SOUTHERN  3Ph*N<^H, 

..NIVERSHY  OF  C*  lfOtiNI> 


/ 


MATERIALS  FOR  THE  STUDY  OF 
ELEMENTARY  ECONOMICS 


THE  UNIVERSITY  OP  CHICAGO  PRESS 
CHICAGO.  ILLINOIS 


THE  BAKER  &  TAYLOR  COMPANY 

NEW  TOBK 

THE  CAMBRIDGE  UNIVERSITY  PRESS 

LONDON 

THE  MARUZEN-KABUSHIKI.KAISHA 

TOKYO,  OSAKA,  KYOTO,  FDKUOKA,  BENDAt 

THE  MISSION  BOOK  COMPANY 

6HANQBAI 


MATERIALS  FOR  THE 
STUDY  OF 

ELEMENTARY  ECONOMICS 


EDITED  BY 

LEON  CARROLL  MARSHALL 

CHESTER  WHITNEY  WRIGHT 

JAMES  ALFRED  FIELD 

OF  THE  DEPARTMENT  OF  POLITICAL  ECONOMY 
THE  UNIVERSITY  OF  CHICAGO 


THE  UNIVERSITY  OF  CHICAGO  PRESS 
CHICAGO.  ILLINOIS 


■i^'^S^ 


Copyright  1913  By 
The  University  of  Chicago 


All  Rights  Reserved 


Published  September  191 3 

Second  Impression  October  1913 

Third  Impression  November  1913 

Fourth  Impression  September  1914 

Fifth  Impression  October  1914 

Second  Edition  Octolx;r  1915 

Second  Iiiipression  September  igi6 

Third  Impression  May  1917 

Fourth  Impression  September  1919 

Fifth  Impression  November  1919 

Sixth  Impression  July  1920 
Seventli  Impression  October  1920 
Eighth  liupression  September  1921 


Composed  and  Printed  By 

The  University  of  Chicago  Press 

Chicago,  Illinois,  U.S.A. 


n 


/7/.S 

PREFACE 

The  materials  collected  in  this  volume  are  intended  to  acquaint 
the  student  with  economic  principles  as  they  are  manifested  in  the 
tangible  facts  of  economic  life.  A  few  extracts  of  primarily  theo- 
retical character  have  been  included  to  represent  important  aspects  of 
contemporary  or  historic  thought;  but  for  the  most  part  the  selections 
are  not  so  much  authoritative  formulations  of  economic  laws  as  con- 
crete case-material  embod3dng  such  laws,  or  affording  a  background  of 
information  which  the  systematic  treatises  on  economics  can  hardly 
give  and  which  the  teacher  certainly  cannot  often  assume  that  his 
students  will  possess.  Various  sources  have  been  drawn  upon,  in- 
cluding not  only  the  writings  of  recognized  economists  but  also  oflBicial 
Uterature  of  governmental  and  private  organizations,  commercial  and 
financial  periodicals,  and  the  daily  press.  Some  of  the  material  has 
been  prepared  especially  for  this  book.  As  regards  form,  the  selections 
comprise  expository  and  descriptive  readings,  statutes,  judicial 
decisions,  the  findings  of  commissions,  news  reports,  statistical  tables, 
schematic  analyses,  and  a  number  of  maps,  charts,  and  diagrams. 

In  the  choice  of  the  materials  the  editors  have  been  guided  by 
actual  classroom  experiment.  The  nucleus  of  the  book  was  originally 
printed  as  a  series  of  bulletins  which  have  for  three  years  formed  a 
part  of  the  reading  required  of  beginning  students  in  economics  at  the 
University  of  Chicago.  During  this  time  unsatisfactory  selections 
have  been  eliminated  and  much  new  matter  has  been  added.  Copies 
of  the  bulletins  have  been  submitted  for  criticism  to  teachers  in  several 
other  institutions.  The  volmne  which  now  appears  may  thus  be  said 
already  in  a  measure  to  have  demonstrated  its  usefulness  as  an  aid 
in  college  instruction. 

The  book  is  not  designed  to  take  the  place  of  a  systematic  text- 
book. Rather,  it  should  be  used  in  conjunction  with  such  a  text. 
No  attempt  has  been  made  to  weld  the  readings  into  a  hard-and-fast 
system.  They  have  purposely  been  left  to  be  utilized  as  the  preference 
of  the  individual  teacher  may  dictate.  There  has  been  no  desire  to 
dogmatize,  or  to  force  upon  the  student  any  particular  interpretation 
of  the  evidence.  In  some  cases  conflicting  views  are  set  forth  in 
different  selections  in  order  to  stimulate  critical  thinking;  and  several 


VI  PREFACE 

extracts  have  been  included  precisely  because  they  seem  to  involve 
unsound  thinking,  or  a  point  of  view  so  remote  from  the  academic  as 
to  deserve  consideration  for  that  very  reason. 

The  editors  wish  to  acknowledge  their  obligation  to  the  many 
authors  and  publishers  who  have  kindly  permitted  the  use  of  extracts 
from  copyrighted  publications.  Every  effort  has  been  made  to  give 
due  mention  of  author  and  publisher  in  each  instance.  Where  a 
selection  is  stated  to  be  "adapted  from"  the  writings  of  a  certain 
author  the  reader  will  understand,  not  that  the  changes  from  the 
original  have  necessarily  been  considerable,  but  simply  that  some 
change  has  been  made  for  which  the  author  is  not  accountable. 
Where  no  source  is  indicated  for  a  selection,  either  by  footnote  or 
by  the  obvious  nature  of  the  topic,  it  may  be  understood  that  the 
editors  assume  responsibility. 

L.  C.  M. 
C.  W.  W. 
J.  A.  F. 

September,  19 13 


TABLE  OF  CONTENTS 

PAGS 

I.  Introductory 

1.  The    Maladjustment    of   Man   and   Nature.     T.   N. 

Carver i 

2.  Man's  Adaptation  of  His  Environment.    Max  Nordau  8 

3.  Ways  of  Getting  a  Living.     T.  N.  Carver    ....  10 

4.  Competition  and  the  Industrial  Revolution.    Arnold 

Toynbee ir 

5.  Exchange  Co-operation.    Adam  Smith 17 

II.  Wants  and  the  Means  of  Their  Satisfaction 

6.  A  Study  of  Human  Wants 20 

7.  The  Apportionment  of  Expenditures.     F.  H.  Streigklof  27 

8.  The  Standard  of  Living.     F.  H.  Streightoff  ....  ^^ 

9.  A  Normal  Standard  of  Living.     Massachusetts  Com- 

mission on  the  Cost  of  Living 37 

10.  A  Classification  of  the  Means  of  Satisfjang  Wants. 

T.  N.  Carver 41 

11.  T3T)ical  Cases  Illustrating  the  Existence  of  Wealth 

behind  Property  Rights.    Irving  Fisher   ....  42 

12.  Forms  of  Wealth.    Irving  Fisher 44 

13.  Forms  of  Property  Rights.     Irving  Fisher    ....  44 

14.  Estimate  of  the  Wealth  of  the  United  States.    Special 

Census  Report 45 

15.  The  Production  of  Economic  Goods.    J.A.Hobson    .       45 

16.  A  Classification  of  Industries.    /.  A.  Eobson    ...       55 

III.  Natural  Resources  as  Economic  Factors 

17.  The  Function  of  Natural  Agents.    0.  T.  Mason     .     .  58 

18.  The  Influence  of  Geographic  Factors.    E.  C.  Semple   .  61 

19.  The  Frontier  in  American  History.    F.  J.  Turner  .     .  66 

20.  An  Illustration  of  the  Law  of  Diminishing  Returns      .  73 

21.  Factors  Counteracting  Diminishing  Returns.    J.  S. 

Mill 74 

22.  Natural  Resources  of  the  United  States  and  Their 

Conservation.    National  Conservation  Commission     .       77 

23.  The  Economic  Possibihties  of  Conservation.    L.  C. 

Gray 102 

vii 


viii  TABLE  OF  CONTENTS 

rAQi 

IV.    Human  Beings  as  Economic  Factors 

34.  Some  Definitions  of  Labor 105 

2$.  The  Relation  of  Labor  to  Natural  Agents  in  Produc- 
tion.   J.  S.  Mill 106 

26.  The  Increase  of   Population   in   the   United   States. 

Henry  Gannett 108 

27.  The  Malthusian  Theory  of  Population 109 

28.  Economic   Influences  on   the   Marriage-Rate.    G.    U. 

Yule Ill 

29.  The  Quality  of  Population 

a)  Non-Survival  of  the  Fittest.     W.  R.  Greg     .     .     .     112 

b)  Eugenics 118 

30.  The  Cost  to  Society  of  a  Family  of  Degenerates. 

R.  L.  Dugdale 121 

31.  The  Conservation  of  Human  Energy.     Irving  Fisher  123 

32.  Causes  of  the  Growth  of  Cities.    A.  F.  Weber  .           .  134 

33.  Immigration  to  the  United  States,  1820-1912  (Chart). 

Commissioner-General  of  Immigration 137 

34.  Sources  of  Immigration  and  Character  of  Immigrants 

Immigration  Commission 138 

35.  Causes  of  Emigration.    Immigration  Commission  .     .     140 

36.  The  Problems  of  Immigration.    /.  W.  Jenks  and  W.  J. 

Lauck 144 

37.  Immigration  and  the  Birth-Rate.    F.A.Walker    .  146 

38.  Fecundity  of  Native  and  Immigrant  Women  in  Rhode 

Island,  1900.     Immigration  Commission    ....      149 

39.  Immigration  and  the  Use  of  Machinery.    /.  R.  Com- 

mons     150 

40.  The  Recommendations  of  the  Immigration  Commission 

Immigration  Commission 152 

V.    Capfial  Goods  as  Economic  Factors 

41.  The  Roundabout  Process.    E.  von  BShm-Bawerk    .     .     157 

42.  Machinery  Used  in  the  Making  of  Pins.     Commissioner 

of  Labor 158 

43.  Hand  vs.  Machine  Methods.    Commissioner  of  Labor     160 

44.  Machinery  vs.  Hand  Labor  in  the  Raising  of  Small 

Grains.    Commissioner  of  Labor 161 

45.  Machine  Methods  in  Agriculture.     H.  V .  Quaintance  .     164 

46.  Relative  Increase  of  Capital  and  Employees  in  Manu- 

facturing   170 

47.  Some  Sources  of  the  Supply  of  Capital.     Wall  Street 

Journal 170 


TABLE  OF  CONTENTS  ix 

PAGE 

48.  Capital — ^Demand  and  Supply.    Journal  of  Commerce  172 

49.  What  Is  Meant  by  Depreciation.     F.A.Delano          .  175 

50.  Inroads  of  War  on  the  Savable  Fund.    Special  Com- 

missioner of  the  Revenue       179 

VI.  The  Organization  of  Industry 

A.  Specialization: 

51.  Limitations  of  the  Division  of  Labor.     J.  S.  Mill  .     .  181 

52.  The  Tin-Peddler  and  the  Development  of  Connecti- 

cut Industries.    R.  M.  Keir 182 

53.  Classification  of  Occupations.    Census 183 

54.  Stages  in  the  Production  of  Iron  and  Steel  Products. 

Commissioner  of  Corporations 189 

55.  The  Localization  of  Manufacturing  Industries.     Census  189 

56.  The  Division  of  Labor  in  Pin-Making.     Adam  Smith  198 

57.  Division  of  Labor  in  Meat  Packing.    /,  R.  Commons  199 

58.  Division    of    Labor   in    the   Shoe-Making    Industry. 

Census 200 

B.  Management: 

59.  The  Problem  of  the  Business  Man 204 

60.  Problems  of  Farm  Management.     T.  N.  Carver      .     .  206 

61.  The  Principles  of  Business  Organization.     The  System 

Company ^  .     .     .      .  207 

62.  Scientific  Management.    F.W.Taylor 219 

63.  Criticisms  of  Scientific  Management.    H.  S.  Person     .  228 

64.  Partnership  Articles 233 

65.  Form  of  Corporation  Charter 234 

66.  A  Charter  "Object  Clause"  (United  States  Steel  Cor- 

poration)      236 

67.  Corporation  Charters  Granted   Before   1800.    5.   E. 

Baldwin 238 

68.  The  Holding  Company.     Interstate   Commerce   Com- 

mission        239 

69.  A  Classification  of  Bonds.     F.  A.  Cleveland     .     .     .  241 

70.  Examples  of  T)T)ical  Investment  Securities       .     .     .  244 
•  '      71.  The  Basis  of  Capitalization.    Industrial  Cbmmission  252 

72.  Methods  of  Stock  Watering.    Industrial  Commission  257 

VII.  Examples  of  Modern  Capitalistic  Organization 

A.    Railroads: 

73.  Transportation  Costs  in   the  Pioneer  Middle  West. 

Isaac  Lippincott 259 


TABLE  OF  CONTENTS 

PAGE 

74.  Widening  of  the  Market  through  Improved  Transpor- 

tation          ■  .      .     .      .     260 

75.  The  Relation  of  the  Transportation  Charge  to  Prices. 

L.  G.  McPherson 261 

76.  Costs  in  Railroad  Operation.     /.  F.  Strombeck        .      .  266 

77.  Added  TrafBc  Pays.     A.  M.  Wellington       ....  269 

78.  A  Result  of  Railroad  Competition.     A.  J.  Cassalt       .  269 

79.  Some  Forms  of  Railroad    Discrimination.      Commis- 

sioner oj  Corporations      270 

80.  Extracts   from   the  Interstate  Commerce  Act.     U.  S. 

statutes 274 

81.  Railway  Rate   Theories  of  the  Interstate  Commerce 

Commission.     M.  B.  Uammond 286 

82.  Valuation  of  Public  Utilities.     Judicial  decisions  .  289 

83.  Suggestions  for  Effective  Public   Utility  Regulation. 

E.  H.  Downey 291 

B.    Industrial  Combinations: 

84.  Forms  of  Combination.     Industrial  Commission     .     .     299 

85.  The  Steel  Rail  Pool  of  1887.    Commissioner  of  Cor- 

porations     304 

86.  The    Continental    Wall    Paper    Company.     Judicial 

decision 307 

87.  The  American  Tobacco  Company.    Commissioner  of 

Corporations 308 

88.  The  United  States  Steel  Corporation.     Commissioner 

of  Corporations 313 

89.  The    Steel     Corporation     Underwriting    Agreement. 

Commissioner  of  Corporations 318 

90.  Companies  Acquired  by  the  United  States  Steel  Cor- 

poration.   Commissioner  of  Corporations  ...      .323 

91.  An   Example  of  Trust  Efficiency.     Commissioner  oj 

Corporations 327 

92.  Proposed  Remedies  for  the  Evils  of  Trusts,     huius- 

trial  Commission 329 

93.  Federal  Anti-Trust  Legislation 334 

VIII.    Markets  and  Trading 

94.  Methods  of  Marketing.    A.  W.  Shaw 340 

95.  Marketing  Farm  Products.    Department  of  Agriculture    352 

96.  Retail  Distribution  of  Farm  Machinery.    Commissioner 

of  Corporations 356 

97.  The   Distributing  System  of  the  International  Har- 

vester Company.     Commissioner  of  Corporations     .     359 

• 


TABLE  OF  CONTENTS  Xl 

PAGE 

98.  Co-operative  Fruit  Marketing.    Department  of  Agri- 

culture        361 

99.  Organized    Exchanges:     Grading    of    Commodities. 

Commissioner  of  Corporations  and  others  ....  364 
100.  Organized  Exchanges:  Futures,  Puts  and  Calls.    Com- 
missioner of  Corporations 368 

IX.    Value 

loi.  Demand  and  General  Overproduction.    /.  S.  Mill  .  371 

102.  Advertising  and  Demand.    A.  W.  Shaw      ....  373 

103.  The  Ability  of  the  Consumer  to  Defend  Himself.    P.  T. 

Cherington 374 

104.  Some  Cases  of  Demand  and  Supply.    Daily  Newspapers  376 

105.  Demand  and  Supply  in  the  Market  for  Agricultural 

Products.    H.  C.  Taylor 380 

106.  Organized   Speculation   and   Its   Regulation.    H.  H. 

Brace 391 

107.  A  Cost  Diagram 396 

108.  Items  Entering  into  Cost.     W.  C.  Redfield  .     ,     .     .  397 

109.  Analysis  of  the  Retail  Price  of  Eggs.    C.  W.  Thompson  407 
no.  Middlemen's  Charges  in  Marketing  Agricultural  Prod- 
ucts.    T.  N.  Carver 408 

111.  Costs  in  the  Retailing  of  Shoes.    Harvard  Bureau  of 

Business  Research 410 

112.  Prices  to  the  Small  Purchaser.    F.  H.  Streightojf  .     .  414 

113.  Package    Goods.    Massachusetts    Commission    on   the 

Cost  of  Living 41 S 

114.  Different  Costs  of  Production  in  Paper  Mills.    TariJ' 

Board 417 

115.  Joint-Product   Prices:    Beef.    Commissioner   of  Cor- 

porations     418 

116.  Direct  and  Indirect  Costs.    /.  F.  Stromheck  .     .      .  419 

117.  Diminishing  Cost  of  Production.    Wall  Street  Journal  421 

118.  Joint  and  Composite  Demand  and  Supply  (Diagram)   .  422 

119.  The  Complexity  of  Competitive  Price  Making.    /.  M. 

Clark 422 

120.  Selling  Below  Cost:   Tobacco.    Commissioner  of  Cor- 

porations     426 

121.  Price  Policies  of  the  Distributer.    A.W.Shaw  .     .     .  426 

122.  Monopoly  Price:   Coffee  Valorization.    Robert  Sloss  .  429 

123.  Discriminating    Prices:     Oil.    Commissioner    of   Cor- 

porations      436 

124.  The  Burden  of  Advertising  Costs.     P.  T.  Cherington  .  438 


xu  TABLE  OF  CXMiTENTS 

PAGS 

X.    Money  and  Prices 

125.  Exchange  by  Barter.     W.  S.  Jevons 443 

126.  The  Early  History  of  Money.     W.  S.  Jevons     .     .     .  445 

127.  A  Monetary  Chronology.     U.S.  Treasury  circular        .  451 

128.  History  of  Coins  and  Currency  of  the  United  States. 

US.  Treasury  circular 452 

129.  Redemption  of  United  States  Money.     U.S.    Treasury 

circular 4^5 

130.  Legal-Tender  Qualities  of  United  States  Money.     U.S. 

Treasury  circular 456 

131.  Statement  of  United  States  Money  in   Circulation. 

U.S.  Treasury  bulletin 457 

132.  Principles  of  Token  Money.    Indianapolis  Monetary 

Commission 458 

133.  Production   of    Gold    and    Silver   since    1492.     U.S. 

Treasury  circular 461 

134.  Commercial  Ratio  of  Silver  to  Gold  Annually  since 

1687.     U.S.  Treasury  circular 462 

135.  Gresham's  Law:  French  Coinage  1817-69  (Diagram)     463 

136.  Increase  in  the  World's  Production  of  Gold,  1800-1906. 

National  Conservation  Commission 464 

137.  The  Increased  Cost  of  Living.    Massachusetts  Com- 

mission on  the  Cost  of  Living 466 

138.  The  Correction  of  Price-Changes.    David  Kinley   .     .  474 

139.  A  Compensated  Dollar.     Irving  Fisher 474 

140.  The  Compensated  Dollar:  A  Criticism.  F.  W.  Taussig  479 

141.  Methods  of  Regulating  a  Paper  Currency.     W.   S. 

Jevons 483 

142.  Paper    Money:   the    Continental     Currency.    David 

Ramsay 485 

143.  Table  of  the  Depreciation  of  the  Continental  Currency. 

Thomas  Jefferson 492 

144.  Greenback  Prices  During  the  Civil  War  (Diagram). 

W.  C.  Mitchell 493 

145.  Depreciated  Paper  Money  in  the  Confederacy.    G.  C. 

Eggleston 493 

146.  Depreciated  Money  and  Wage-Earners:  The  Strike  at 

Iquique.    /.  L.  Laughlin 496 

XI.    Credit  and  Banking 

147.  Credit  Instruments 499 

148.  The  Use  of  Credit  Instruments.     David  Kinley  .      .  .500 

149.  The  Clearing  House.     J.  G,  Cannon 503 


TABLE  OF  CONTENTS  nil 

PAGE 

150.  The  Journey  of  a  Check.    J.G.Cannon    .     .     .     .     512 

151.  Weekly  Statement  by  the  Federal  Reserve  Board. 

Commercial  and  Financial  Chronicle 514 

152.  Weekly  Statement  of  New  York  Clearing-House  Banks  516 

153.  Statements  of  Typical  American  Banks      ....  518 

154.  Number  of  Private,  State,  and  National  Banks,  1877- 

1909    (Diagram).    G.  E.  Barnett 522^ 

155.  Statements  of  the  Bank  of  England,  The  Bank  of 

France,  and  the  Reichsbank 523 

156.  The  Elasticity  of  Currency.    Indianapolis  Monetary 

Commission 525 

157.  A  Summary  View  of  the  Work  of  the  Independent 

Treasury.     David  Kinky S3i 

158.  Bankers'  Views  of  Our  Banking  and  Currency  Needs. 

American  Bankers^  Association 535 

159.  The  Federal  Reserve  Act  of  December  23,  1913    .     .     539 

160.  The  Case  against  State  Guaranty  of  Bank  Deposits. 

A.  P.  Andrew 545 

XII.  International  Trade  and  Foreign  Exchange 

161.  The  Foreign  Trade  of  the  United  States,  1912-13. 

Journal  of  Commerce 547 

162.  The  Trade  Balance  of  the  United  States.    George  Paish     549 

163.  The  Balance  of  Trade  and  Gold  Shipments.     Wall 

Street  Journal 559 

164.  Commercial  Credits  in  the  Financing  of  Imports  and 

Exports.    Franklin  Escher 559 

165.  A  Documentary  Commercial  Long  Bill      .     .     .     .  566 

166.  The  Par  of  Exchange  and  Approximate  Gold  Points  .  566 

167.  Foreign  Exchange  Transactions.    Howard  K.  Brooks  .  567 

168.  Foreign  Exchange  Quotations.    Howard  K.  Brooks      .  568 

169.  The  Foreign  Exchange  Market.    Franklin  Escher  .     .  570 

170.  Factors  Affecting   the   Rates  of  Foreign  Exchange. 

Journal  of  Commerce 574 

XIII,  Tariff  Poucy 

171.  A  Summary  of  the  Tariff  History  of  the  United  States    578 

172.  Principal  Sources  of  Customs  Revenue,  191 2.  Statistical 

A  bstract  of  the  United  States 585 

173.  The  Balance  of  Trade  and  Protection 

a)  A  Mercantilist  Point  of  View.    Charles  King    .     .     585 

b)  An  American  Argument.   Association  of  Wool  Manu- 

facturers     *.     .     590 

174.  A  Home-Market  Argument.    William  Lawrence    .     .     590 


nv  TABLE  OF  CONTENTS 

PAOB 

175.  Improved  Transportation  and  Protection 

a)  An   American   Campaign    Argument.     Republican 

Campaign  Text-Book 591 

b)  A  Spanish  Analogy.     Frideric  Bastiat     ....     592 

176.  Two  proposals  for  Increasing  the  Demand  for  Labor. 

FridSric  Bastiat 593 

177.  The  Law  of  Comparative  Costs  and  the  Working  of  the 

Tariff.     F.  W.  Taussig S97 

XIV.    Rent 

178.  The' Origin  of 'Agricultural  Rent.     F.  M.  Taylor  .     .  609 

179.  RenX- Diagrams 617 

180.  Some  Factors  Affecting  Land  Values.    R.  M.  Hurd  .  620 

181.  Railroads  and  Land  Values.    /.  D.  Andrews     .     .     .  627 

182.  Land  Valuation.     R.  M.  Hurd 628 

183.  Cai^-Fares  and  Suburban  Site- Values.    Grosvenor  Alter- 

bury 634 

184.  The  Value  of  a  Chicago  Quarter-Acre,  1830-94.    Illinois 

Bureau  of  Labor  Statistics 635 

185.  Examples    of    Real    Estate    Transactions.    Chicago 

Daily  Tribune 639 

XV.    Wages 

186.  Labor  as  a  Source  of  Income.     F.  H.  Streightoff  .     .     640 

187.  Two  Early  Theories  of  Wages 

a)  A  Cost  of  Subsistence  Theory  of  Wages.    David 

Ricardo 643 

b)  The  Wages  Fund.    James  Mill 645 

/.  5.  Mill 646 

188.  Wages  and  Hours  of  Labor.     Statistical  Abstract  of  tht 

United  States 647 

189.  Women's  Work  and  Wages.    J.  A.  Hobson       .     .     .  647- 

190.  Time  Wages  and  Piece  Wages.    Industrial  Commission  659 

191.  Wage  Systems  and  Labor  Management.     C.  B.  Going  661 

XVI.    Labor  Problems 

192.  Purposes    of    the    American    Federation    of    Labor. 

Official  statement 668 

193.  Structure  of  the  American  Federation  of  Labor  (Dia- 

gram).    Official  report 670 

194.  Membership  of   the  American   Federation   of  Labor. 

Official  report 671 

195.  Union  Charters  Issued  by  the  American  Federation  of 

Labor.     Official  report ...     67 1 


TABLE  OF  CONTENTS  xv 

PAGE 

196.  Extracts  from  the  Constitution  of  the  International 

Union  United  Mine  Workers    .     .     .     .     .     .      .     672 

197.  Joint  Interstate   Agreement   of   Coal   Operators  and 

Miners.     Text  of  the  Official  Agreement     ....     683 

198.  A  Piece-Work  Wage-Scale  Agreement.     Pollers'  Asso- 

cialion ;      .      .      .     691 

199.  The  Attitude  of  the  Typographical   Union  Toward 

Machinery.    Industrial  Commission 693 

200.  The  Dayton  Employers'  Association.    A.  C.  Marshall  694 

201.  The  National  Founders' Association.     Official  pamphlet  695 

202.  The  United  T5q)othetae  of  America.    Official  pamphlet  698 

203.  Industrial  Unionism  and  the  Industrial   Workers  of 

the  World.     Vincent  St.  John 700 

204.  Statistics  of  the  Extent  of  Strikes.     U.S.  Commissioner 

of  Labor 705 

205.  Causes  of  Strikes.     U.S.  Commissioner  of  Labor  .     .     706 

206.  Estimates  of  Losses  Due  to  Strikes  and  Lockouts 

o)  Twenty  Years  of  Losses  from  Strikes  and  Lockouts. 

U'-S.  Commissioner  of  Labor 708 

b)  Losses  from  the  Anthracite  Coal  Strike  of  1902. 

Anthracite  Coal  Strike  Commission 708 

207.  Unemployment  and  a  Proposed  Solution  of  the  Prob- 

lem.   Royal  Commission  on  Ihe  Poor  Laws     .     .     .  709 

208.  Seasonal   Unemployment    (Chart) 715 

209.  Long  Hours  versus  Efficiency.    Josephine  Goldmark  .  716 

210.  The  Sweating  System.    Industrial  Commission       .      .  721 

211.  The  Economic  Theory  of  a  Legal  Minimum  Wage. 

Sidney  Webb 723 

212.  The  Minnesota  Minimum  Wage  Law  of  1913.    Minne- 

sota statutes 733 

213.  Machinery  and  the  Quality  of  Labor,    J.A.Hobson  .  737 

214.  Employers'  Liability.    G.  L.  Campbell 747 

215.  A  Survey  of  Workingmen's  Insurance  in  the  United 

States.    C.  R.  Henderson 756 

216.  Summary  of  Workingmen's  Insurance  Laws  in  Ger- 

many.   L.  K.  Frankel  and  M.  M.  Dawson     .     .     .     761 

XVII.    Interest 

217.  Theories  of  Interest.    Irving  Fisher  .     .     .     .     .     .     762 

William  Smart 764 

,  218.  Interest  Rates.     W.  A.  Scott 773 

219.  Conditions  in  the  Money  Market.    Journal  of  Com- 
merce      783 


XVI  TABLE  OF  CONTENTS 

PACK 

220.  Differences  in  Rates  of  Interest  on  Public  Loans 

a)  Special  Census  Report 785 

b)  Statistical  Abstract  of  ihe  United  Slates      ....  785 

221.  Table  of  Bond  Values 786 

222.  The  Relation  of  Interest  Rates  to  Rising  or  Falling 

Prices.    H.  G.  Brown 787 

223.  The  Theory  of  Bond  Values  During  a  Rising-Price  Era. 

W.  E.  Clark 788 

XVTII.    Profits 

224.  Walker's  Theory  of  Profits.    F.A.Walker.     .     .     .  790 

225.  The  Risk  Theory  of  Profits.    F.  B.  Hawley       ...  795 

226.  Classes  of  Risks  to  Capital.    A.  H.  Willett  ....  796 

227.  The  Classes  of  Risk-Takers.    F.  B.  Hawley       .     .     .  799 

228.  Hedging  as  an  Insurance  against  Risk.    Commissioner 

of  Corporations 801 

229.  Fire  Insurance  and  Credit.    5.  S.  Euehner  ....     807 

230.  Embarrassment  of  Industry  through  Lack  of  Insurance. 

Journal  of  Commerce       .     .      .      .» 810 

231.  Some    Functions    and    Effects    of    Insurance.    John 

Haynes 811 

232.  Financial  Statements  of  Two  Corporations.    Annual 

reports       .     .     .     ., 814 

233.  Monopoly  Profits:  The  Tobacco  Trust.    Commissioner 

of  Corporations 818 

234.  An  Example  of  Fortuitous  Profits.    Special  Commis- 

sioner of  the  Revenue        818 

235.  The  Profits  of  an  Underwriting  Syndicate.    Commis- 

sioner of  Corporations      819 

236.  A  Classification  of  Business  Failures  by  Causes.     Brad- 

street's  822 

237.  Two  Instances  of  Failure.    Financial  journals  .     .     .     823 

XIX.    Public  Finance  and  Taxation 

238.  The  Growth  of  State  and  Local  Expenditures.    W.  F. 

Gephart 824 

239.  Federal  Expenditures  (Chart) 828 

240.  The  Cost  of  Government,  National,  State,  and  Local. 

E.  V.  D.  Robinson 829 

241.  Total  Debt  of  the  United  States,  National,  State,  and 

Local  (Diagram).    Special  Census  Report       .     .     .     841 

242.  Public  Debt  of  the  United  States,  1791-1911  (Chart)  .     842 

243.  Public  Debt  of  the  United  States,  and  of  Cash  in  the 

Treasury,  191 5.    U .  S .  Treasury  Bulletin  ....     843 


TABLE  OF  CONTENTS  xvii 

PAGE 

244.  Total   and  Per  Capita  Debt  of  Certain   Countries. 

Statistical  Abstract  of  the  United  States       ....     846 

245.  Principal  Sources  of  Ordinary  Federal  Revenues  by 

Decades,  1800-1910  (Chart) 847 

246.  The.Adequacy  of  the  Customs  Revenue  System.    R.  F. 

Hoxie 847 

247.  Some   General  Difficulties  in  Our  State   Systems  of 

Taxation.    E.  R.  A.  Seligman 853 

248.  A  System  of  State  and  Local  Taxes  and  Their  Appor- 

tionment.   Minnesota  Tax  Commission     .     .     .     .     855 

249.  The  General  Property  Tax.    Special  Committee,  Inter- 

national Tax  Association 860 

"  250.  The  Taxation  of  Intangible  Personalty.    Minnesota 

Tax  Commission 862 

Commissioner  of  Corporations 864 

251.  Taxation  of  Corporations.    Commissioner  of  Corpora- 

tions      865 

252.  The  Inheritajice  Tax.    C.  /.  Bullock 870 

253.  Income  Taxes 

a)  The  Federal  Income  Tax 874 

b)  The  Income  Tax   in  Wisconsin.    Minnesota   Tax 

Commission 876 

254.  Separation  of  State  and  Local  Revenues.    Minnesota 

Tax  Commission 8S0 

255.  The  Taxes  on  Land  in  Western  Canada.    Minnesota 

Tax  Commission 883 

256.  The  Single-Tax  Argument.    C.  B.  Fillebrown    .     .     .     889 

257.  The  Land-Value  Tax  as  a  Social  Reform.    Fels  Fund    894 

XX.    Some  Programs  op  Social  Reform 

258.  Profit-Sharing  in  the  N.  0.  Nelson  Manufacturing 

Company.    N.  O.  Nelson 898 

259.  Profit-Sharing  and  Labor-Copartnership.     T.  C.  Taylor    899 

260.  A  Promising  Venture  in  Industrial  Partnership.     R.  F. 

Foerster 901 

261.  The  Rochdale  Plan  of  Co-operation.    James  Ford       .  904 

262.  Co-operative  Creameries.    James  Ford 905 

263.  Co-operative  Stores.    James  Ford 907 

264.  Causes  of  the  Failure  of  Co-operative  Stores  in  America. 

/.  B.  Cross 908 

265.  Wastes  in  the  Competitive  Distribution  of  Milk  .     .  911 

266.  Socialism.    0.  D.  Skelton 911 

267.  The  National  Platform  of  the  Socialist  Party    .     .     .  921 


I.  INTRODUCTORY 

I.  THE  MALADJUSTMENT  OF  MAN  AND  NATURE* 

The  question,  Why  do  things  have  the  power  to  satisfy  wants? 
would  lead  us  back  through  physiology  and  psychology  quite  to 
the  borders  of  the  unknowable.  The  question,  Why  are  they 
scarce?  would  lead  us  also  toward  the  unknowable,  but  by  a  some- 
what different  route.  Into  this  philosophical  hinterland  of  his 
science  the  economist  has  generally  refrained  from  bursting  lest 
he  should  be  found  poaching  upon  the  preserves  of  the  philosopher; 
but  there  are  some  things  in  this  region  which,  when  seen  through 
the  eyes  of  the  economist,  may  come  to  have  a  new  significance. 

Of  course  the  first  and  most  obvious  reason  for  the  scarcity  of 
goods  is  that  nature  has  not  provided  them  in  sufficient  abundance 
to  satisfy  all  the  people  who  want  them.  Of  some  things,  it  is 
true,  she  is  bounteous  in  her  supply;  but  of  others  she  is  niggardly. 
Things  which  are  so  bountifully  supplied  as  to  satisfy  all  who 
want  them  do  not  figure  as  wealth,  or  economic  goods,  because 
we  do  not  need  to  economize  in  their  use.  But  things  which  are 
scantily  supplied  must  be  meted  out  and  made  to  go  as  far  as  pos- 
sible. That  is  what  it  means  to  economize.  Because  we  must 
practice  economy  with  respect  to  them  they  are  called  economic 
goods  or  wealth.  In  fact  the  whole  economic  system  of  society,  the 
whole  system  of  production,  of  valuation,  of  exchange,  of  distribu- 
tion, and  of  consumption,  is  concerned  with  this  class  of  goods — 
toward  increasing  their  supply  and  making  the  existing  supply  go 
as  far  as  possible  in  the  satisfaction  of  wants. 

The  fact  that  there  are  human  wants  for  whose  satisfaction 
nature  does  not  provide  in  sufficient  abundance — in  other  words, 
the  fact  of  scarcity — signifies  that  man  is,  to  that  extent  at  least, 
out  of  harmony  with  nature.  The  desire  for  fuel,  clothing,  and 
shelter  grows  out  of  the  fact  that  the  climate  is  more  severe  than 
our  bodies  are  fitted  to  endure,  and  this  alone  argues  a  very  con- 
siderable lack  of  harmony.  The  lack  is  only  emphasized  by  the 
fact  that  it  is  necessary  for  us  to  labor  and  endure  fatigue  in  order 
to  provide  ourselves  with  these  means  of  protecting  our  bodies  against 

'Adapted  from  T.  N.  Carver,  "The  Economic  Basis  of  the  Problem  of  Evil," 
in  The  Harvard  Theological  Review^  I,  g8  ff.  (January,  i 


2  MATERIALS  FOR  ELEMENTARY  EgONOMICS 

the  rigors  of  nature.  That  labor  also  which  is  expended  in  the  pro- 
duction of  food  means  nothing  if  not  that  there  are  more  mouths  to 
be  fed,  in  certain  regions  at  least,  than  nature  has  herself  provided 
for.  She  must  therefore  be  subjugated,  and  compelled  to  yield  larger 
returns  than  she  is  willing  to  do  of  her  own  accord.  And  that  expand- 
ing multitude  of  desires,  appetites,  and  passions  which  drive  us  as 
with  whips;  which  send  us  to  the  ends  of  the  earth  after  gewgaws 
with  which  to  bedeck  our  bodies,  and  after  new  means  of  tickling 
the  five  senses;  which  make  us  strive  to  outshine  our  neighbors,  or 
at  least  not  to  be  outshone  by  them — these  even  more  than  our 
normal  wants  show  how  widely  we  have  fallen  out  of  any  natural 
harmony  which  may  supposedly  have  existed  in  the  past. 

That  there  is  a  deeper  harmony  lying  hidden  somewhere  be- 
neath these  glaring  disharmonies  is  quite  possible.  Certainly  no 
one  can  positively  assert  that  it  is  not  so.  It  may  be  true,  as  some 
profoundly  believe,  that  these  natural  discomforts,  with  the  necessity 
for  work  which  accompanies  them,  furnish  a  discipline  which  is 
necessary  for  our  highest  good.  Being  thus  driven  by  a  vis  a  lergo 
toward  our  own  highest  good,  we  may  be  in  harmony  with  our  sur- 
roimdings  in  ways  which  do  not  appear  to  our  immediate  sense  of  self- 
interest.  But  this  whole  question  lies  within  the  field  of  philosophical 
conjecture,  and  nothing  positive  can  be  afl5rmed  on  either  side. 

Whatever  our  belief  upon  that  point  may  be,  there  is  not  the 
slightest  doubt  that  men  are  sometimes  cold  and  hungry  and  sick; 
and  that  these  discomforts  would  be  much  more  frequent  than  they  now 
are,  if  men  did  not  work  to  prevent  them.  But  work  causes  fatigue. 
Obviously  the  individual  cannot  be  expected  to  see  in  this  situation 
any  sign  of  a  complete  harmony  between  himself  and  his  material 
environment.  So  far  as  the  individual  can  see  and  understand,  the 
lack  of  harmony  between  himself  and  nature  is  a  very  real  one. 

Viewed  from  this  standpoint,  the  whole  economic  struggle  becomes 
an  effort  to  attain  to  a  harmony  which  does  not  naturally  exist.  As 
is  well  known,  the  characteristic  difference  between  the  non-econo- 
mizing animals,  on  the  one  hand,  and  man,  the  economizer,  on  the 
other,  is  that  in  the  process  of  adaptation  the  animals  are  passively 
adapted  to  their  environment,  whereas  man  assumes  the  active  role 
in  attempting  to  adapt  his  environment  to  himself.  If  the  climate 
is  cold,  animals  must  develop  fur  or  blubber;  but  man  builds  fires, 
constructs  shelters,  and  manufactures  clothing.  If  there  are  enemies 
to  fight  against,  the  animals  must  develop  claws  or  fangs,  horns  or 


INTRODUCTORY  3 

hoofs,  whereas  man  makes  bows  and  arrows,  or  guns  and  ammunition. 
The  whole  evolutionary  process,  both  passive  and  active,  both  bio- 
logical and  economic,  is  a  development  away  from  less  toward  greater 
adaptation,  from  less  toward  greater  harmony  between  the  species 
and  its  environment. 

That  phase  of  the  disharmony  between  man  and  nature  which 
takes  the  form  of  scarcity  gives  rise  also  to  a  disharmony  between 
man  and  man.  Where  there  is  scarcity  there  will  be  two  men  wanting 
the  same  thing;  and  where  two  men  want  the  same  thing  there  is 
an  antagonism  of  interests.  Where  there  is  an  antagonism  of  interests 
between  man  and  man  there  will  be  questions  to  be  settled,  questions 
of  right  and  wrong,  of  justice  and  injustice;  and  these  questions 
could  not  arise  under  any  other  condition.  The  antagonism  of 
interests  is,  in  other  words,  what  gives  rise  to  a  moral  problem,  and 
it  is,  therefore,  about  the  most  fundamental  fact  in  sociology  and 
moral  philosophy. 

This  does  not  overlook  the  fact  that  there  are  many  harmonies 
between  man  and  man,  as  there  are  between  man  and  nature.  There 
may  be  innumerable  cases  where  all  human  interests  harmonize, 
but  these  give  rise  to  no  problem  and  therefore  we  do  not  need  to 
concern  ourselves  with  them.  As  already  pointed  out,  there  are 
many  cases  where  man  and  nature  are  in  complete  harmony.  There 
are  things,  for  example,  which  nature  furnishes  in  sufl&cient  abundance 
to  satisfy  all  our  wants;  but  these  also  give  rise  to  no  problem. 
Toward  these  non-economic  goods  our  habitual  attitude  is  one  of 
indifference  or  unconcern.  Where  the  relations  between  man  and 
nature  are  perfect,  why  should  we  concern  ourselves  about  them  ? 
But  the  whole  industrial  world  is  bent  on  improving  those  relations 
where  they  are  imperfect.  Similarly  with  the  relations  between  man 
and  man;  where  they  are  perfect,  that  is,  where  interests  are  all 
harmonious,  why  should  we  concern  ourselves  about  them?  As  a 
matter  of  fact  we  do  not.  But  where  they  are  imperfect,  where 
interests  are  antagonistic  and  trouble  is  constantly  arising,  we  are 
compelled  to  concern  ourselves  whether  we  want  to  or  not.  As  a 
matter  of  fact,  we  do  concern  ourselves  in  various  ways;  we  work  out 
systems  of  moral  philosophy  and  theories  of  justice  after  much 
disputation;  we  estabUsh  tribunals  where,  in  the  midst  of  much 
wrangling,  some  of  these  theories  are  applied  to  the  settlement  of 
actual  conflicts;  we  talk  and  argue  interminably  about  the  proper 
adjustment  of  antagonistic  interests  of  various  kinds,  all  of  which. 


4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

it  must  be  remembered,  grow  out  of  the  initial  fact  of  scarcity — that 
there  are  not  as  many  things  as  people  want. 

Fundamentally,  therefore,  there  are  only  two  practical  problems 
imposed  upon  us.  The  one  is  industrial  and  the  other  moral;  the 
one  has  to  do  with  the  improvement  of  the  relations  between  man 
and  nature,  and  the  other  with  the  improvement  of  the  relations 
between  man  and  man.  But  these  two  primary  problems  are  so 
inextricably  intermingled,  and  they  deal  with  such  infinitely  varying 
factors,  that  the  secondary  and  tertiary  problems  are  more  than  we 
can  count. 

But  whence  arises  that  phase  of  the  conflict  with  nature  out  of 
which  grows  the  conflict  between  man  and  man?  Is  man  in  any 
way  responsible  for  it,  or  is  it  due  wholly  to  the  harshness  or  the 
niggardliness  of  nature  ?  The  fruitfulness  of  nature  varies,  of  course, 
in  different  environments.  But  in  any  environment  there  are  two 
conditions,  for  both  of  which  man  is  in  a  measure  responsible,  and 
either  of  which  will  result  in  economic  scarcity.  One  is  the  indefinite 
expansion  of  human  wants,  and  the  other  is  the  multiplication  of 
numbers.  The  well-known  expansive  power  of  human  wants,  con- 
tinually running  beyond  the  power  of  nature  to  satisfy,  has  attracted 

the  attention  of  moralists  in  all  times  and  places Even 

if  the  wants  of  the  individual  never  expanded  at  all,  it  is  quite  obvious 
that  an  indefinite  increase  in  the  number  of  individuals  in  any  locality 
would,  sooner  or  later,  result  in  scarcity  and  bring  them  into  conflict 
with  nature,  and  therefore  into  conflict  with  one  another. 

These  considerations  reveal  a  third  form  of  conflict — perhaps  it 
ought  to  be  called  the  second — a  conflict  of  interests  within  the 
individual  himself.  If  the  procreative  and  domestic  instincts  are 
freely  gratified,  there  will  inevitably  result  a  scarcity  of  means  of 
satisfying  other  desires,  however  modest  those  desires  may  be,  through 
the  multiplication  of  numbers.  Either  horn  of  the  dilemma  leaves 
us  with  unsatisfied  desires  of  one  kind  or  another.  We  are  therefore 
pulled  in  two  directions,  and  this  also  is  a  condition  from  which  there 
is  no  possible  escape.  But  this  is  only  one  illustration  of  the  internal 
strife  which  tears  the  individual.  The  very  fact  of  scarcity  means 
necessarily  that  if  one  desire  is  satisfied  it  is  at  the  expense  of  some 
other.  What  I  spend  for  luxuries  I  cannot  spend  for  necessaries; 
what  I  spend  for  clothing  I  cannot  spend  for  food;  and  what  I  spend 
for  one  kind  of  food  I  cannot  spend  for  some  other.  This  is  the 
situation  which  calls  for  economy,  since  to  economize  is  merely  to 


INTRODUCTORY  5 

choose  what  desires  shall  be  gratified,  knowing  that  certain  others 
must,  on  that  account,  remain  ungratified.  Economy  always  and 
everywhere  means  a  threefold  conflict:  a  conflict  between  man  and 
nature,  between  man  and  man,  and  between  the  different  interests 
of  the  same  man. 

In  this  antagonism  of  interests,  growing  out  of  scarcity,  the 
institutions  of  property,  of  the  family,  and  of  the  state,  all  have 
their  common  origin.  No  one,  for  example,  thinks  of  claiming 
property  in  anything  which  exists  in  suflBcient  abundance  for  all. 
But  when  there  is  not  enough  to  go  around,  each  unit  of  the  supply 
becomes  a  prize  for  somebody,  and  there  would  be  a  general  scramble, 
did  not  society  itself  undertake  to  determine  to  whom  each  unit 
should  belong.  Possession,  of  course,  is  not  property;  but  when 
society  recognizes  one's  right  to  a  thing,  and  undertakes  to  protect 
him  in  that  right,  that  is  property.  Wherever  society  is  sufficiently 
organized  to  recognize  these  rights  and  to  afford  them  some  measure 
of  protection,  there  is  a  state;  and  there  is  a  family  wherever  there 
is  a  small  group  within  which  the  ties  of  blood  and  kinship  are  strong 
enough  to  overcome  any  natural  rivalry  and  to  create  a  unity  of 
interests.  This  unity  of  economic  interests  within  the  group  is 
sufficient  to  separate  it  from  the  rest  of  the  world,  or  from  other 
similar  groups  among  which  the  natural  rivalry  of  interests  persists. 
Saying  nothing  of  the  barbaric  notion  that  wives  and  children  are 
themselves  property,  even  in  the  higher  types  of  society  it  is  the 
desire  to  safeguard  those  to  whom  one  is  bound  by  ties  of  natural 
affection,  by  sharing  the  advantages  of  property  with  them,  which 
furnishes  the  basis  for  the  legal  definition  of  the  family  group. 

Closely  associated  with  the  right  of  property — as  parts  of  it  in 
fact — is  a  group  of  rights  such  as  that  of  contract,  of  transfer,  of 
bequest,  and  a  number  of  other  things  with  which  lawyers  occupy 
themselves.  It  would  be  difficult  to  find  any  question  in  the  whole 
science  of  jurisprudence,  or  of  ethics,  or  politics,  or  any  of  the  social 
sciences  for  that  matter,  which  does  not  grow  out  of  the  initial  fact 
of  economic  scarcity  and  the  consequent  antagonism  of  interests 
among  men.  This  reveals,  as  nothing  else  can,  the  underlying  unity 
of  all  the  social  sciences,  that  is,  of  all  the  sciences  which  have  to  do 
with  the  relations  between  man  and  man;  and  it  shows  very  clearly 
that  the  unifying  principle  is  an  economic  one.  Even  the  so-called 
gregarious  instinct  may  very  probably  be  the  product  of  the  struggle 
for  existence,  which,  in  turn,  is  the  product  of  scarcity — the  advan- 


6  MATERIALS  FOR  ELEMENTARY  ECONOxMICS 

tage  of  acting  in  groups  being  the  selective  agency  in  the  develop- 
ment of  this  instinct.  But  that  question,  like  a  great  many  others, 
lies  beyond  the  field  of  positive  knowledge.  This  does  not  necessarily 
constitute  economics  as  the  "master  science,"  with  the  other  social 
sciences  subordinate  to  it;  but  it  does  signify  that,  if  there  is  such  a 
thing  as  a  master  science,  economics  has  the  first  claim  to  that  position 
among  the  social  sciences.  The  economic  problem  is  the  fundamental 
one,  out  of  which  all  other  social  and  moral  problems  have  grown. 

It  would  be  interesting  to  follow  up  our  conclusion  with  an  exami- 
nation of  the  possibilities  of  escape  from  the  situation  which  is  imposed 
upon  us  by  economic  scarcity.  Out  of  the  view  that  the  conflict  of 
man  \\ath  nature  is  a  source  of  evil  grow  two  widely  diflferent  practical 
conclusions  as  to  social  conduct.  If  we  assume  that  nature  is  benefi- 
cent and  man  at  fault,  the  conclusion  follows  as  a  matter  of  course 
that  desires  must  be  curbed  and  brought  into  harmony  with  nature, 
wh;ch  is  closely  akin  to  Stoicism,  if  it  be  not  its  very  essence.  But 
if,  on  the  contrary,  we  assume  that  human  nature  is  sound,  then  the 
only  practical  conclusion  is  that  external  nature  must  be  coerced  into 
harmony  with  man's  desires  and  made  to  yield  more  and  more  for 
their  satisfaction.  This  is  the  theory  of  the  modern  industrial  spirit 
in  its  wild  pursuit  of  wealth  and  luxury.  Complete  escape,  by 
either  of  these  methods,  seems  to  be  cut  off,  in  the  first  place  by  the 
refusal  of  desires,  especially  the  elementary  ones,  to  be  repressed, 
and,  in  the  second  place,  by  the  utter  impossibiUty  of  increasing  goods 
to  a  point  which  will  provide  for  every  possible  increase  in  population 
when  population  is  unchecked  by  economic  motives.  If  economic 
motives  continue  to  operate  as  a  check  upon  population,  that  is  in 
itself  an  evidence  of  continued  scarcity.  But  if  they  do  not  operate, 
and  the  procreative  instincts  are  given  free  play,  there  is  absolutely 
no  limit  to  the  increase  of  population. 

But  even  under  the  conditions  of  economic  scarcity  there  would 
be  no  antagonism  of  interests  between  man  and  man  if  human  nature 
were  to  undergo  a  change  by  which  altruism  were  to  replace  egoism. 
If  I  could  develop  the  capacity  to  enjoy  food  upon  my  neighbor's 
palate  as  well  as  upon  my  own,  as  I  have  already  developed  the 
capacity  to  enjoy  it  upon  the  palates  of  my  children,  and  if  my 
neighbor  could  develop  a  like  regard  for  me,  obviously  there  could 
be  no  antagonism  of  interests  between  us  on  the  subject  of  food. 
Let  this  capacity  become  universal,  and  the  moral  problem  would  be 
solved.     That  would  be  the  Christian's  Millennium.     Whether  this 


INTRODUCTORY  7 

way  of  escape  lies  open  or  not,  in  other  words,  whether  such  a  change 
in  human  nature  is  possible  or  not,  is  a  problem  for  the  psychologist 
or  the  religionist.  That  we  may  approach  it  indefinitely  seems 
reasonable,  but  that  it  is  ever  attainable,  either  by  the  method  of 
biological  evolution  or  of  evangelization,  or  by  both  combined,  is 
by  no  means  a  foregone  conclusion.  It  is  certainly  a  long  way  off. 
Meanwhile  what  are  we  to  do  ? 

We  may  escape  from  some  of  the  worst  features  of  the  situation 
by  working  along  several  Hues  at  the  same  time.  Every  improve- 
ment in  the  arts  of  production,  whereby  a  given  quantity  of  labor 
is  enabled  to  produce  a  larger  quantity  of  the  means  of  satisfying 
wants,  tends,  of  course,  in  some  degree  to  alleviate  scarcity.  If 
this  can  be  supplemented  by  the  doctrine  of  the  simple  Ufe,  made 
effective  especially  in  the  Uves  of  the  wealthier  classes,  so  much 
the  better;  for  then  there  will  be  fewer  wants  to  satisfy.  If  this 
result  can  be  still  further  strengthened  by  a  rising  sense  of  the  respon- 
sibilities of  parenthood,  whereby  the  reckless  spawning  of  population 
can  be  checked,  especially  among  those  classes  who  can  least  afford 
to  spawn,  the  discrepancy  between  numbers  and  provisions  will  be 
kept  at  a  minimum.  Again,  a  more  widespread  spirit  of  altruism, 
or  even  a  milder  and  more  enlightened  egoism  such  as  that  which 
moves  the  farmer  to  take  delight  in  the  sleek  appearance  of  his  horses, 
or  the  English  landlord  to  take  pride  in  the  comfortable  appearance 
of  his  tenants  and  cotters,  would  go  a  long  way  toward  softening  the 
antagonism  of  interests  among  men. 

In  spite  of  all  these  methods,  however,  there  will  still  be  antago- 
nistic interests  to  be  adjudicated.  The  state  must  therefore  continue 
to  administer  justice.  But  every  improvement  in  our  conceptions 
of  justice,  as  well  as  in  the  machinery  for  the  administration  of 
justice,  whereby  a  closer  approximation  to  exact  justice  may  be 
secured,  will  make  for  social  peace;  though  the  mere  adjudication 
of  conflicting  interests  will  not  remove  the  conflicts  themselves  nor 
their  cause.    That  Hes  deeper  than  legislatures  or  courts  can  probe. 

These  conclusions  sound  commonplace  enough,  and  are  doubtless 
disappointing  to  those  who  hope  for  a  new  earth  through  some  engine 
of  social  regeneration.  The  old  world  is  already  pegging  away,  and 
has  been  for  a  very  long  time,  upon  all  the  plans  which  have  been 
mentioned  in  this  paper.  But  after  all,  the  old  world  is  wise — 
much  wiser  than  any  man,  though  there  are  some  men  who  think 
otherwise. 


8 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Note. — Professor  Carver  has  sometimes  indicated  the  field  of  economics  by 
means  of  the  following  diagram: 

/^Passive  adaptation  in  which  man  is  passively  adapted  to 
his  environment,  e.  g.,  by  taking  on  fat  in  Arctic  regions. 
The  economist  is  not  concerned  with  passive  adaptation 


The  attempt  to  secure 
a  better  adjustment 
of  man  and  nature  is 
a  process  of  adapta- 
tion 


Active  adaptation  in 
which  man  adapts 
his  environment  to 
himself 


/Physical  processes 
I.  Production  of    \ 
II.  Exchange  of       > 
III.  Consumption  of) 


Wealth  and 
services 


Psychical  processes  (valuation) 
I.  Valuation  of  material  goods 

1.  Consumers' goods 

2.  Producers'  goods 

a)  Land  and  natural  agents 

b)  Capital 

c)  Laborers  (where  slavery 

exists) 
II.  Valuation  of  services 

1.  Of  land  and  natural  agents 
(rent) 

2.  Of  capital  (interest) 

3.  Of  laborers  (wages) 

4.  Of  enterprisers  (profits) 


2.  MAN'S  ADAPTATION  OF  fflS  ENVIRONMENT' 

Man,  and  man  alone  of  living  creatures,  neither  submitted  to  the 
sentence  of  death  pronounced  by  nature  against  all  the  creatures  to 
whom  she  denied  the  means  for  continued  existence,  nor  directed  his 
efforts  to  alter  his  corporeal  organization  to  suit  murderous  natural  con- 
ditions. He  made  some  alteration  in  his  diet,  took  to  eating  meat 
instead  of  the  fruits,  roots,  eggs,  jelly-  and  shell-fish  that  were  natural 
to  him;  but  in  essentials  he  remained  unchanged.  He  did  not  grow 
a  fur  coat.  On  the  contrary,  he  lost  the  covering  of  hair  that  had 
not  been  a  protection  against  the  cold  so  much  as  a  means  of  strength- 
ening his  skin  and  preserving  it  against  insects,  sunburn,  and  rain, 
and  perhaps  of  adorning  it.  He  did  not  harden  himself  to  bid  defi- 
ance to  the  open  weather,  after  the  fashion  of  the  beasts  of  the  fields 
and  of  the  woods.  He  did  not  strain  after  the  mane  and  claws  of  the 
lion,  the  iron  muscle  and  complicated  digestion  of  the  cud-chewing 
ox.  On  the  contrary,  he  invented  a  mode  of  adjustment  surpassing 
the  ingenuity  of  any  previous  creature  on  the  earth.  Instead  of 
altering  himself,  he  directed  his  efforts  to  the  alteration  of  external 
conditions.     Instead  of  trying  to  fit  his  organism  into  an  environment 

'  From  Nordau,  The  Inter pr elation  of  History,  pp.  137-40.  Moffat,  Yard  & 
Co.,  191 1. 


INTRODUCTORY  9 

that  had  become  incompatible  with  his  needs,  he  tried  to  adapt  that 
environment  to  his  organism  and  its  needs. 

This  new  and  peculiarly  human  method  of  adjustment  is  still 
going  on,  and  will  probably  never  cease.  It  is  incessantly  becoming 
more  delicate,  skilful,  and  complete;  all  man's  gifts  are  devoted  to  it; 
it  is,  as  a  matter  of  fact,  the  sole  distinct  meaning  which  the  impartial 
observer  can  discern  in  the  course  of  history;  it  determines  all  human 
events  that  are  determined  by  the  will  of  man  rather  than  the  order 
of  nature.  According  to  all  biological  laws,  man  should  have  disap- 
peared from  the  surface  of  the  earth  with  the  first  Ice  Age,  just  as 
every  other  living  thing  before  him  vanished  so  soon  as  the  free  gifts 
of  nature  no  longer  satisfied  its  organic  needs.  But  he  maintained^ 
himself  in  defiance  of  nature.  Instead  of  submitting,  he  advanced 
resolutely  to  the  combat.  His  survival  is  a  rebellion  against  the  sen- 
tence of  death  pronounced  against  him,  and  still  valid Every- 
where, and  at  every  hour,  he  has  to  wrest  from  nature  the  necessities 
of  existence  with  his  own  hands.  From  birth  to  death  he  surrounds 
himself  with  artificial  conditions;  if  he  neglects  them  for  a  moment, 
his  life  is  in  imminent  danger.  His  body  has  to  be  protected.  In 
very  warm  climates,  clothing,  like  tattooes  and  scars,  the  various 
ornaments  in  nose  and  lips,  the  hanging  of  trinkets  round  the  neck, 
on  breast  and  limbs,  may  have  originated  as  a  form  of  adornment  and 
distinction ;  but  in  colder  latitudes  the  covering  of  the  body  was  mainly 
due  to  the  necessity  of  keeping  warm.  Man  makes  his  supreme 
discovery,  never  surpassed  or  equalled — the  kindling  and  keeping  up 
of  fire.  With  its  aid  he  secures  the  degree  of  warmth  helpful  and 
agreeable  to  him,  which  the  chemical  action  of  his  own  cells  cannot 
provide;  by  using  fire  in  the  preparation  of  his  foods  he  simplifiea 
digestion,  and  is  enabled  to  extract  nutriment  of  various  natural 
kinds  that  he  could  not  otherwise  have  enjoyed.  Moreover,  he 
acquires  an  instrument  that  spares  much  expenditure  on  muscular 
strength,  and  makes  possible  exertions  that  muscle  alone  could  not 
have  accomplished.  Many  animals  whose  absolute  needs  are  satis- 
fied by  nature  need  over  and  above  a  nest  or  shelter,  and  man  most 
of  all.  He  soon  ceased  to  depend  on  the  holes  which  he  found  ready 
made,  and  began  to  dig  out  or  build  up  roofs  and  walls.  In  this  way 
he  secured,  within  his  own  small  circle,  that  protection  from  the 
wind,  that  dryness  and  warmth,  that  the  open  air  no  longer  afforded. 
He  artificially  created  the  climate  that  he  thought  suited  him.  With 
ever  active  inventiveness  and  ardent  zeal,  he  wrested  from  his  environ- 


lO 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


ment  everj'thing  that  it  denied  him,  which  he  could  not  as  yet  do 
without.  His  whole  existence  is  as  paradoxical  as  that  of  the  diver  in 
the  depths  of  the  sea.  Destruction  threatens  it  whenever  one  of  the 
manifold  precautions  erected  by  man  for  his  own  preservation  is 
disturbed.  Goethe's  Homunculus,  who  can  only  live  in  the  retort 
in  which  he  was  created,  and  must  instantly  perish  with  the  breaking 
of  his  glass,  appears  one  of  the  most  far-fetched  and  unreal  creations 
of  the  poetic  imagination.  As  a  matter  of  fact,  it  is  reality  itself,  a 
perfect  symbol  of  the  relations  "of  man  to  nature.  The  artificial 
protections  that  inclose  him  are  like  the  glass  retort;  if  he  emerge 
from  them  and  stand,  naked  as  he  was  born,  face  to  face  with  nature, 
he  must  perish  without  hope,  and  descend  to  the  fossils  which  once 
lived  and  flourished  so  long  as  nature  permitted,  and  disappeared 
without  a  struggle  when  warmth  and  nourishment  were  withdrawn 
from  them. 

3.    WAYS  OF  GETTING  A  LIVING' 

fWar 
Piracy 
Pkmder 
Swindling 
Counterfeiting 
Adulteration  of  goods 

,  Monopolizing 


1.  Uneconomical 


Ways     of 

Getting  a 

Living 


I.  Destructive 


2.  Neutral 


'  Marrying  wealth 
Inheriting  wealth 
Benefiting  through  a  rise 
in  land  values 


'  I.  Primary  industries 


II.  Economical 


Farming 
Mining 
Hunting 
Fishing 
^  Lumbering 


2.  Secondary  industries 


Manufacturing 
Transporting 
Storing 
,  Merchandising 


3.  Personal  or  professional 
service 


Healing 
Teaching 
Inspiring 
Governing 
Amusing 
etc. 


■  From  T.  N.  Carver,  Principles  of  Rural  Economics,  p.  xx.    Ginn  &  Co.,  1911. 


INTRODUCTORY  II 

4.    COMPETITION  AND  THE  INDUSTRIAL  REVOLUTION* 

The  contrast  between  the  industrial  England  of  1760  and  the 
industrial  England  of  today  is  not  only  one  of  external  conditions. 
Side  by  side  with  the  revolution  which  the  intervening  century  has 
effected  in  the  methods  and  organization  of  production,  there  has 
taken  place  a  change  no  less  radical  in  men's  economic  principles 
and  in  the  attitude  of  the  state  to  individual  enterprise.  England 
in  1760  was  still  to  a  great  extent  under  the  mediaeval  system  of 
minute  and  manifold  industrial  regulations.  That  system  was 
indeed  decaying,  but  it  had  not  yet  been  superseded  by  the  modern 
principle  of  industrial  freedom.  To  understand  the  origin  of  the 
mediaeval  system  we  must  go  back  to  a  time  when  the  state  was  still 
conceived  of  as  a  religious  institution  with  ends  that  embraced  the 
whole  of  himian  life.  In  an  age  when  it  was  deemed  the  duty  of  the 
state  to  watch  over  the  individual  citizen  in  all  his  relations,  and  pro- 
vide not  only  for  his  protection  from  force  and  fraud,  but  for  his  eternal 
welfare,  it  was  but  natural  that  it  should  attempt  to  insure  a  legal 
rate  of  interest,  fair  wages,  honest  wares.  Things  of  vital  importance 
to  man's  life  were  not  to  be  left  to  chance  or  self-interest  to  settle. 
For  no  philosophy  had  as  yet  identified  God  and  Nature;  no  optimistic 
theory  of  the  world  had  reconciled  public  and  private  interest.  And 
at  the  same  time,  the  smallness  of  the  world  and  the  community,  and 
the  comparative  simplicity  of  the  social  system  made  the  attempt  to 
regulate  the  industrial  relations  of  men  less  absurd  than  it  would 
appear  to  us  in  the  present  day. 

This  theory  of  the  state,  and  the  policy  of  regulation  and  restriction 
which  sprang  from  it,  still  largely  affected  English  industry  at  the 
time  when  Adam  Smith  wrote.  There  was,  indeed,  great  freedom 
of  internal  trade;  there  were  no  provincial  customs-barriers  as  in 
contemporary  France  and  Prussia.  Adam  Smith  singled  out  this 
fact  as  one  of  the  main  causes  of  English  prosperity,  and  to  Colbert 
and  Stein,  and  other  admirers  of  the  EngHsh  system,  such  freedom 
appeared  as  an  ideal  to  be  constantly  striven  after.  But  though 
internal  trade  was  free  for  the  passage  of  commodities,  yet  there  still 
existed  a  network  of  restrictions  on  the  mobility  of  labor  and  capital. 
By  the  law  of  apprenticeship  no  person  could  follow  any  trade  till  he 
had  served  his  seven  years.  The  operation  of  the  law  was  limited, 
it  is  true,  to  trades  already  established  in  the  fifth  year  of  Elizabeth, 

'  Adapted  from  Arnold  Toynbee,  The  Industrial  Revolution,  chaps,  vii  and  viii 


12  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  obtained  only  in  market  towns  and  cities.  But  wherever  there 
was  a  municipal  corporation,  the  restrictions  which  they  imposed 
made  it  generally  impossible  for  a  man  to  work  unless  he  was  a  free- 
man of  the  town,  and  this  he  could  as  a  rule  become  only  by  serving 
his  apprenticeship.  Moreover,  the  corporations  supervised  the  prices 
and  qualities  of  wares.  In  the  halls,  where  the  smaller  manufacturers 
sold  their  goods,  all  articles  exposed  for  sale  were  inspected.  The 
mediaeval  idea  still  obtained  that  the  state  should  guarantee  the 
genuineness  of  wares;  it  was  not  left  to  the  consumer  to  discover 
their  quality.  And  in  the  Middle  Ages,  no  doubt,  when  men  used 
the  same  things  from  year  to  year,  a  proper  supervision  did  secure 
good  work.  But  with  the  expansion  of  trade  it  ceased  to  be  efTective. 
Sir  Josiah  Child  already  recognized  that  changes  of  fashion  must 
prove  fatal  to  it,  and  that  a  nation  which  intended  to  have  the  trade 
of  the  world  must  make  articles  of  every  quality.  Yet  the  belief  in  the 
necessity  of  regulation  was  slow  in  dying  out,  and  fresh  acts  to  secure 
it  were  passed  as  late  as  George  II's  reign 

The  essence  of  the  Industrial  Revolution  is  the  substitution  of 
competition  for  the  mediaeval  regulations  which  had  previously 
controlled  the  production  and  distribution  of  wealth.  Competition, 
we  have  now  learnt,  is  neither  good  nor  evil  in  itself;  it  is  a  force 
which  has  to  be  studied  and  controlled;  it  may  be  compared  to  a 
stream  whose  strength  and  direction  have  to  be  observed,  that 
embankments  may  be  thrown  up  within  which  it  may  do  its  work 
harmlessly  and  beneficially.  But  at  the  period  we  are  considering 
it  came  to  be  believed  in  as  a  gospel,  and,  the  idea  of  necessity  being 
superadded,  economic  laws  deduced  from  the  assumption  of  universal 
unrestricted  competition  were  converted  into  practical  precepts,  from 
which  it  was  regarded  as  little  short  of  immoral  to  depart. 

Coming  to  the  facts  of  the  Industrial  Revolution,  the  first  thing 
that  strikes  us  is  the  far  greater  rapidity  which  marks  the  growth  of 
population.  Before  1751  the  largest  decennial  increase,  so  far  as 
we  can  calculate  from  our  imperfect  materials,  was  3  per  cent.  For 
each  of  the  next  three  decennial  periods  the  increase  was  6  per  cent; 
then  between  1781  and  1791  it  was  9  per  cent;  between  1791  and  1801, 
II  per  cent;  between  1801  and  1811,  14  per  cent;  between  1811  and 
182 1,  18  per  cent.  This  is  the  highest  figure  ever  reached  in  England, 
for  since  181 5  a  vast  emigration  has  been  always  tending  to  moderate 
it;  between  181 5  and  1880  over  eight  millions  (including  Irish)  have 


INTRODUCTORY  13 

left  our  shores.    But  for  this  our  normal  rate  of  increase  would  be 
16  or  18  instead  of  12  per  cent  in  every  decade. 

Next  we  notice  the  relative  and  positive  decline  in  the  agricultural 
population.  In  181 1  it  constituted  35  per  cent  of  the  whole  popula- 
tion of  Great  Britain;  in  1821,  33  per  cent;  in  1831,  28  per  cent. 
And  at  the  same  time  its  actual  numbers  have  decreased.  In  1831 
there  were  1,243,057  adult  males  employed  in  agriculture  in  Great 
Britain;  in  1841  there  were  1,207,989.  In  1851  the  whole  number 
of  persons  engaged  in  agriculture  in  England  was  2,084,153;  in 
1861  it  was  2,010,454,  and  in  1871  it  was  1,657,138.  Contempo- 
raneously with  this  change,  the  center  of  density  of  population  has 
shifted  from  the  Midlands  to  the  North;  there  are  at  the  present 
day  458  persons  to  the  square  mile  in  the  counties  north  of  the  Trent, 
as  against  312  south  of  the  Trent.  And  we  have  lastly  to  remark 
the  change  in  the  relative  population  of  England  and  Ireland.  Of  the 
total  population  of  the  three  kingdoms,  Ireland  had  in  182 1 32  per  cent, 
in  1881  only  14.6  per  cent. 

An  agrarian  revolution  plays  as  large  part  in  the  great  industrial 
change  of  the  end  of  the  eighteenth  century  as  does  the  revolution  in 
manufacturing  industries,  to  which  attention  is  more  usually  directed. 
Our  next  inquiry  must  therefore  be:  What  were  the  agricultural 
changes  which  led  to  this  noticeable  decrease  in  the  rural  population  ? 
The  three  most  effective  causes  were:  the  destruction  of  the  common- 
field  system  of  cultivation;  the  enclosure,  on  a  large  scale,  of  common 
and  waste  lands;  and  the  consolidation  of  small  farms  into  large. 
We  have  already  seen  that  while  between  17 10  and  1760  some  300,000 
acres  were  enclosed,  between  1760  and  1843  nearly  7,000,000  under- 
went the  same  process.  Closely  connected  with  the  enclosure  sys- 
tem was  the  substitution  of  large  for  small  farms.  The  process  went 
on  uninterruptedly  into  the  present  century.  Cobbett,  writing  in 
1826,  says:  "In  the  parish  of  Burghclere  one  single  farmer  holds 
under  Lord  Carnarvon,  as  one  farm,  the  lands  that  those  now  living 
remember  to  have  formed  fourteen  farms,  bringing  up  in  a  respectable 
way  fourteen  families."  The  consolidation  of  farms  reduced  the 
number  of  farmers,  while  the  enclosures  drove  the  laborers  off  the 
land,  as  it  became  impossible  for  them  to  exist  without  their  rights  of 
pasturage  for  sheep  and  geese  on  common  lands. 
-  Severely,  however,  as  these  changes  bore  upon  the  rural  popula- 
tion, they  wrought,  without  doubt,  distinct  improvement  from  an 


14  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

agricultural  point  of  view.  They  meant  the  substitution  of  scientific 
for  unscientific  culture.  "It  has  been  found,"  says  Laurence,  "by 
long  experience,  that  common  or  open  fields  are  great  hindrances  to 
the  public  good,  and  to  the  honest  improvement  which  every  one  might 
make  of  his  own."  Enclosures  brought  an  extension  of  arable  culti- 
vation and  the  tillage  of  inferior  soils;  and  in  small  farms  of  40  to  100 
acres,  where  the  land  was  exhausted  by  repeated  corn  crops,  the  farm 
buildings  of  clay  and  mud  walls  and  three-fourths  of  the  estate  often 
saturated  with  water,  consolidation  into  farms  of  100  to  500  acres 
meant  rotation  of  crops,  leases  of  nineteen  years,  and  good  farm  build- 
ings. The  period  was  one  of  great  agricultural  advance;  the  breed 
of  cattle  was  improved,  rotation  of  crops  was  generally  introduced, 
the  steam-plough  was  invented,  agricultural  societies  were  instituted. 
In  one  respect  alone  the  change  was  injurious.  In  consequence  of  the 
high  prices  of  corn  which  prevailed  during  the  French  war,  some  of 
the  finest  permanent  pastures  were  broken  up.  Still,  in  spite  of  this, 
it  was  said  in  1813  that  during  the  previous  ten  years  agricultural 
produce  had  increased  by  one-fourth,  and  this  was  an  increase  upon  a 
great  increase  in  the  preceding  generation. 

Passing  to  manufactures,  we  find  here  the  all-prominent  fact  to 
be  the  substitution  of  the  factory  for  the  domestic  system,  the  conse- 
quence of  the  mechanical  discoveries  of  the  time.  Four  great  inven- 
tions altered  the  character  of  the  cotton  manufacture;  the  spinning- 
jenny,  patented  by  Hargreaves  in  1770;  the  water-frame,  invented 
by  Arkwright  the  year  before;  Crompton's  mule  introduced  in  1779, 
and  the  self-acting  mule,  first  invented  by  Kelly  in  1792,  but  not 
brought  into  use  till  Roberts  improved  it  in  1825.  None  of  these 
by  themselves  would  have  revolutionized  the  industry.  But  in  1769 
— the  year  in  which  Napoleon  and  Wellington  were  born — ^James  Watt 
took  out  his  patent  for  the  steam-engine.  Sixteen  years  later  it  was 
applied  to  the  cotton  manufacture.  In  1785  Boulton  and  Watt  made 
an  engine  for  a  cotton-mill  at  Papplewick  in  Notts,  and  in  the  same 
year  Arkwright's  patent  expired.  These  two  facts  taken  together 
mark  the  introduction  of  the  factory  system.  But  the  most  famous 
invention  of  all,  and  the  most  fatal  to  domestic  industry,  the  power- 
loom,  though  also  patented  by  Cartwright  in  1785,  did  not  come  into 
use  for  several  years,  and  till  the  power-loom  was  introduced  the 
workman  was  hardly  injured.  At  first,  in  fact,  machinery  raised  the 
wages  of  spinners  and  weavers  owing  to  the  great  prosperity  it  brought 
to  the  trade.     In  fifteen  years  the  cotton  trade  trebled  itself;  from 


INTRODUCTORY  15 

1788  to  1803  has  been  called  "its  golden  age";  for,  before  the  power- 
loom  but  after  the  introduction  of  the  mule  and  other  mechanical 
improvements  by  which  for  the  first  time  yarn  sufficiently  fine  for 
muslin  and  a  variety  of  other  fabrics  was  spun,  the  demand  became 
such  that  "old  barns,  carthouses,  out-buildings  of  all  descriptions  . 
were  repaired,  windows  broke  through  the  old  blank  walls,  and  all 
fitted  up  for  loom-shops;  new  weavers'  cottages  with  loom-shops 
arose  in  every  direction,  every  family  bringing  home  weekly  from  40 
to  120  shillings  per  week."  At  a  later  date,  the  condition  of  the 
workman  was  very  different.  Meanwhile,  the  iron  industry  had  been 
equally  revolutionized  by  the  invention  of  smelting  by  pit-coal  brought 
into  use  between  1770  and  1750,  and  by  the  application  in  1788  of  the 
steam-engine  to  blast  furnaces.  In  the  eight  years  which  followed 
this  latter  date,  the  amount  of  iron  manufactured  nearly  doubled 
itself, 

A  further  growth  of  the  factory  system  took  place  independent 
of  machinery,  and  owed  its  origin  to  the  expansion  of  trade,  an 
expansion  which  was  itself  due  to  the  great  advance  made  at  this 
time  in  the  means  of  communication.  The  canal  system  was  being 
rapidly  developed  throughout  the  country.  In  1777  the  Grand 
Trunk  canal,  96  miles  in  length,  connecting  the  Trent  and  Mersey, 
was  finished;  Hull  and  Liverpool  were  connected  by  one  canal 
while  another  connected  them  both  with  Bristol;  and  in  1792,  the 
Grand  Junction  canal,  90  miles  in  length,  made  a  waterway  from 
London  through  Oxford  to  the  chief  midland  towns.  Some  years 
afterward,  the  roads  were  greatly  improved  under  Telford  and 
Macadam;  between  1818  and  1829  more  than  a  thousand  additional 
miles  of  turnpike  road  were  constructed;  and  the  next  year,  1830, 
saw  the  opening  of  the  first  railroad.  These  improved  means  of 
communication  caused  an  extraordinary  increase  in  commerce,  and 
to  secure  a  sufficient  supply  of  goods  it  became  the  interest  of  the 
merchants  to  collect  weavers  around  them  in  great  numbers,  to  get 
looms  together  in  a  workshop,  and  to  give  out  the  warp  themselves 
to  the  workpeople.  To  these  latter  this  system  meant  a  change  from 
independence  to  dependence;  at  the  beginning  of  the  century  the 
report  of  a  committee  asserts  that  the  essential  difference  between 
the  domestic  and  the  factory  system  is,  that  in  the  latter  the  work  is 
done  "by  persons  who  have  no  property  in  the  goods  they  manu- 
facture." Another  direct  consequence  of  this  expansion  of  trade  was 
the  regular  recurrence  of  periods  of  over-production  and  of  depression. 


1 6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

a  phenomenon  quite  unknown  under  the  old  system,  and  due  to  this 
new  form  of  production  on  a  large  scale  for  a  distant  market. 

These  altered  conditions  in  the  production  of  wealth  necessarily 
involved  an  equal  revolution  in  its  distribution.  In  agriculture  the 
prominent  fact  is  an  enormous  rise  in  rents.  Up  to  1795,  though 
they  had  risen  in  some  places,  in  others  they  had  been  stationary  since 
the  Revolution.  But  between  1790  and  1833,  according  to  Porter, 
they  at  least  doubled.  In  Scotland,  the  rental  of  land,  which  in  1795 
had  amounted  to  £2,000,000,  had  risen  in  181 5  to  £5,278,685.  A 
farm  in  Esse.x,  which  before  1793  had  been  rented  at  105  an  acre,  was 
let  in  181 2  at  505,  though  six  years  after,  this  had  fallen  again  to 
355.  In  Berks  and  Wilts,  farms  which  in  1790  were  let  at  145,  were 
let  in  1810  at  705,  and  in  1820  at  $os.  Much  of  this  rise,  doubtless, 
was  due  to  money  invested  in  improvements — the  first  Lord  Leicester 
is  said  to  have  expended  £400,000  on  his  property — but  it  was  far 
more  largely  the  effect  of  the  enclosure  system,  of  the  consolidation 
of  farms,  and  of  the  high  price  of  corn  during  the  French  war.  What- 
ever may  have  been  its  causes,  however,  it  represented  a  great  social 
revolution,  a  change  in  the  balance  of  political  power  and  in  the 
relative  position  of  classes.  The  farmers  shared  in  the  prosperity 
of  the  landlords;  for  many  of  them  held  their  farms  under  beneficial 
leases,  and  made  large  profits  by  them.  In  consequence,  their 
character  completely  changed;  they  ceased  to  work  and  live  with 
their  laborers,  and  became  a  distinct  class.  The  high  prices  of  the 
war  time  thoroughly  demoralized  them,  for  their  wealth  then  increased 
so  fast  that  they  were  at  a  loss  what  to  do  with  it.  Cobbett  has 
described  the  change  in  their  habits,  the  new  food  and  furniture,  the 
luxury  and  drinking,  which  were  the  consequences  of  more  money 
coming  into  their  hands  than  they  knew  how  to  spend.  Meanwhile, 
the  effect  of  all  these  agrarian  changes  upon  the  condition  of  the  laborer 
was  an  exactly  opposite  and  most  disastrous  one.  He  felt  all  the 
burden  of  high  prices,  while  his  wages  were  steadily  falling,  and  he 
had  lost  his  common-rights.  It  is  from  this  period,  viz.,  the  beginning 
of  the  present  century,  that  the  alienation  between  farmer  and 
laborer  may  be  dated. 

Exactly  analogous  phenomena  appeared  in  the  manufacturing 
world.  The  new  class  of  great  capitalist  employers  made  enormous 
fortunes,  they  took  little  or  no  part  personally  in  the  work  of  their 
factories,  their  hundreds  of  workmen  were  individually  unknown 
to  them;   and  as  a  consequence,  the  old  relations  between  masters 


INTRODUCTORY  I7 

and  men  disappeared,  and  a  "cash  nexus"  was  substituted  for  the 
human  tie.  The  workmen  on  their  side  resorted  to  combination,  and 
trades  unions  began  a  fight  which  looked  as  if  it  were  between 
mortal  enemies  rather  than  joint  producers.  The  misery  which 
came  upon  large  sections  of  the  working  people  at  this  epoch  was 
often,  though  not  always,  due  to  a  fall  in  wages,  for,  as  I  said  above, 
in  some  industries  they  rose.  But  they  suffered  likewise  from  the 
conditions  of  labor  under  the  factory  system,  from  the  rise  of  prices, 
especially  from  the  high  price  of  bread  before  the  repeal  of  the  corn- 
laws,  and  from  those  sudden  fluctuations  of  trade,  which,  ever  since 
production  has  been  on  a  large  scale,  have  exposed  them  to  recurrent 
periods  of  bitter  distress.  The  effects  of  the  Industrial  Revolution 
prove  that  free  competition  may  produce  wealth  without  producing 
well-being.  We  all  know  the  horrors  that  ensued  in  England  before 
it  was  restrained  by  legislation  and  combination. 

S.    EXCHANGE  CO-OPERATION' 

It  is  the  great  multiplication  of  the  productions  of  all  the  different 
arts,  in  consequence  of  the  division  of  labor,  which  occasions,  in  a 
well-governed  society,  that  universal  opulence  which  extends  itself  to 
the  lowest  ranks  of  the  people.  Every  workman  has  a  great  quantity 
of  his  own  work  to  dispose  of  beyond  what  he  himself  has  occasion 
for;  and  every  other  workman  being  exactly  in  the  same  situation, 
he  is  enabled  to  exchange  a  great  quantity  of  his  own  goods  for  a 
great  quantity,  or,  what  comes  to  the  same  thing,  for  the  price  of  a 
great  quantity  of  theirs.  He  supplies  them  abundantly  with  what 
they  have  occasion  for,  and  they  accommodate  him  as  amply  with 
what  he  has  occasion  for,  and  a  general  plenty  diffuses  itself  through 
all  the  different  ranks  of  the  society. 

Observe  the  accommodation  of  the  most  common  artificer  or  day- 
laborer  in  a  civilized  and  thriving  country,  and  you  will  perceive 
that  the  number  of  people  of  whose  industry  a  part,  though  but  a 
small  part,  has  been  employed  in  procuring  him  this  accommodation, 
exceeds  all  computation.  The  woolen  coat,  for  example,  which  covers 
the  day-laborer,  as  coarse  and  rough  as  it  may  appear,  is  the  produce 
of  the  joint  labor  of  a  great  multitude  of  workmen.  The  shepherd, 
the  sorter  of  the  wool,  the  wool-comber  or  carder,  the  dyer,  the 
scribbler,  the  spinner,  the  weaver,  the  fuller,  the  dresser,  with  many 

'  From  Adam  Smith,  The  Wealth  of  Nations,  Book  I,  chap.  i. 


l8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Others,  must  all  join  their  different  arts  in  order  to  complete  even  this 
homely  production.  How  many  merchants  and  carriers,  besides, 
must  have  been  employed  in  transporting  the  materials  from  some  of 
those  workmen  to  others  who  often  live  in  a  very  distant  part  of  the 
country!  How  much  commerce  and  navigation  in  particular,  how 
many  ship-builders,  sailors,  sail-makers,  rope-makers,  must  have 
been  employed  in  order,  to  bring  together  the  different  drugs  made 
use  of  by  the  dyer,  which  often  come  from  the  remotest  corners  of  the 
world !  What  a  variety  of  labor  too  is  necessary  in  order  to  produce 
the  tools  of  the  meanest  of  those  workmen!  To  say  nothing  of  such 
complicated  machines  as  the  ship  of  the  sailor,  the  mill  of  the  fuller, 
or  even  the  loom  of  the  weaver,  let  us  consider  only  what  a  variety 
of  labor  is  requisite  in  order  to  form  that  very  simple  machine,  the 
shears  with  which  the  shepherd  clips  the  wool.  The  miner,  the  builder 
of  the  furnace  for  smelting  the  ore,  the  feller  of  the  timber,  the  burner 
of  the  charcoal  to  be  made  use  of  in  the  smelting-house,  the  brick- 
maker,  the  bricklayer,  the  workmen  who  attend  the  furnace,  the 
millwright,  the  forger,  the  smith,  must  all  of  them  join  tlieir  different 
arts  in  order  to  produce  them.  Were  we  to  examine,  in  the  same 
manner,  all  the  different  parts  of  his  dress  and  household  furniture,  the 
coarse  linen  shirt  which  he  wears  next  his  skin,  the  shoes  which  cover 
his  feet,  the  bed  which  he  lies  on,  and  all  the  different  parts  which 
compose  it,  the  kitchen-grate  at  which  he  prepares  his  victuals,  the 
coals  which  he  makes  use  of  for  that  purpose,  dug  from  the  bowels 
of  the  earth,  and  brought  to  him  perhaps  by  a  long  sea  and  a  long  land 
carriage,  all  the  other  utensils  of  his  kitchen,  all  the  furniture  of  his 
table,  the  knives  and  forks,  the  earthen  or  pewter  plates  upon  which 
he  serves  up  and  divides  his  victuals,  the  different  hands  employed 
in  preparing  his  bread  and  his  beer,  the  glass  window  which  lets  in  the 
heat  and  the  light,  and  keeps  out  the  wind  and  the  rain,  with  all  the 
knowledge  and  art  requisite  for  preparing  that  beautiful  and  happy 
invention,  without  which  these  northern  parts  of  the  world  could  scarce 
have  afforded  a  very  comfortable  habitation,  together  with  the  tools 
of  all  the  different  workmen  employed  in  producing  those  different  con- 
veniencies;  if  we  examine,  I  say,  all  these  things,  and  consider  what  a 
variety  of  labor  is  employed  about  each  of  them,  we  shall  be  sensible 
that  without  the  assistance  and  co-operation  of  many  thousands,  the 
very  meanest  person  in  a  civilized  country  could  not  be  provided,  even 
according  to,  what  we  very  falsely  imagine,  the  easy  and  simple 


INTRODUCTORY  I9 

manner  in  which  he  is  commonly  accommodated.  Compared,  indeed, 
with  the  more  extravagant  luxury  of  the  great,  his  accommodation 
must  no  doubt  appear  extremely  simple  and  easy;  and  yet  it  may  be 
true,  perhaps,  that  the  accommodation  of  an  European  prince  does  not 
always  so  much  exceed  that  of  an  industrious  and  frugal  peasant,  as 
the  accommodation  of  the  latter  exceeds  that  of  many  an  African  king, 
the  absolute  master  of  the  lives  and  liberties  of  ten  thousand  naked 
savages. 


II.     WANTS  AND  THE  MEANS  OF  THEIR 
SATISFACTION 

6.  A  STUDY  OF  HUMAN  WANTS 

A  complete  understanding  of  modern  industrial  society  would 
obviously  involve  an  understanding  of  its  motive  forces.  Very  likely 
we  shall  never  know  all  the  details  of  all  the  motive  forces  actuating 
society.  Nevertheless,  some  few  propositions  seem  reasonably  clear 
and  it  is  worth  while  to  set  these  forth. 

We  know  that  one  of  the  basic  social  facts  is  the  very  common- 
place one  that  Nature  does  not  spontaneously  furnish  means  of  satis- 
faction for  all  our  wants,  or  even  for  most  of  them.  We  know  that 
this  fact  serves  largely  to  explain  the  struggles  of  man  with  nature 
and  the  struggles  of  man  with  man.  It  follows,  accordingly,  that 
a  study  of  the  characteristics  of  human  wants  should  reveal  many 
of  the  motive  forces  behind  modern  society.  This  field  of  study, 
enormous  in  extent  and  bafBing  in  its  elusiveness,  clearly  belongs  to 
the  psychologist.  The  economist  can  make  no  pretense  of  originality 
or  comprehensiveness  in  dealing  with  such  a  subject.  He  must  rest 
content  with  selecting  a  few  propositions  having  significance  for  his 
purposes. 

I.  There  seems  to  be  Utile  or  no  cause  to  hope  that  the  sum  total  oj 
human  wants  will  ever  be  sated.  Hearn,  in  his  Plulology,  has  discussed 
this  matter  at  considerable  length. 

"Food,   drink,   air,   and  warmth    are   the   most   urgent  .... 

necessities These    necessities    man    shares    with    all    other 

animals He    has    also,    beyond   all    other    creatures,    other 

faculties,  which,  besides  their  own  requirements,  seriously  affect  the 
gratification  of  the  primary  appetites;  for  man  is  able  not  merely  to 
satisfy  his  primary  wants,  but  to  devise  means  for  their  better  and 

more  complete  gratification He  alone  has  cooked  his  food. 

He  alone  has  infused  his  drink.  He  alone  has  discovered  new  kinds 
of  food  or  drink.  He  alone  has  improved  the  construction  of  his 
dwelling,  and  has  provided  for  its  ventilation.  He  alone  clothes  his 
body,  and  varies  that  clothing  according  to  the  changes  of  tempera- 
ture or  his  own  ideas  of  decoration.  He  alone  is  not  content  with  the 
mere  satisfaction,  in  whatever  manner,  of  his  physical  wants,  but 

so 


WANTS  AND  MEANS  OF  SATISFACTION  ai 

exercises  a  selection  as  to  the  mode  of  their  satisfaction.  So  strong 
in  him  is  this  tendency  to  the  adaptation  of  his  means  that,  in  favor- 
able circumstances,  he  regards  the  preparation  of  the  objects  which 
are  intended  for  his  gratification  as  of  hardly  less  importance  than  the 
gratification  itsglf.  Thus  the  comparative  range  of  human  wants  is 
rapidly  increased.  When  the  question  of  degree  is  admitted  in  the 
satisfaction  of  the  primary  appetites,  and  when  the  greater  or  less 
adaptability  of  various  objects  to  satisfy  these  appetites  is  recognized, 
the  extent  of  human  desires  is  bounded  only  by  the  extent  of  human 
skill. 

"As  the  attempt  to  satisfy  the  primary  appetites  thus  gives  rise 
to  new  desires,  so  the  actual  increase  of  these  desires  tends  of  itself 
to  a  still  further  development.  The  enjoyment  that  a  man  has  once 
received  he  generally  desires  to  renew.  The  mere  repetition  soon 
becomes  a  reason  for  its  further  repetition.  By  the  powerful  influence 
of  habit  the  desire  becomes  a  taste,  and  the  taste  quickly  passes  into 
an  absolute  want.  Nor  is  this  all.  The  mere  exercise  of  the  faculties 
strengthens  them,  and  gives  rise  to  a  comparison  of  results  and  a 
desire  for  further  improvement.  The  man  whose  senses  are  educated 
to  a  certain  point,  who  has  had  to  a  certain  extent  experience  of 
different  modes  of  satisfying  his  desires,  and  has  formed  a  judgment 
upon  the  comparative  eflSciency  of  these  modes,  will  seldom,  in 
favorable  circumstances,  stop  at  that  point.  Not  merely  would  a 
return  to  what  pleased  his  untaught  faculties  be  intolerable  to  him, 
but  the  actual  enjoyment  which  he  derives  from  his  discovery  stimu- 
lates him  to  further  advances,  and  suggests  the  modes  of  obtaining 
them.  Thus  while  man  is  not  guided  and  limited  by  a  blind  instinct, 
but  each  individual  is  left  free  to  rise  or  fall  according  to  the  exercise 
of  his  powers,  provision  is  made,  even  in  the  primary  wants  of  our 
nature,  both  to  prevent  the  retrogression  of  the  species  and  to  secure 
its  advancement.  The  number  of  wants  that  belongs  to  this  class  is 
therefore  limited,  as  I  have  said,  by  our  knowledge  of  the  properties 
of  matter  or  of  material  objects  fitted  to  satisfy  our  wants,  and  by 
our  skill  in  their  adaptation.  This  knowledge  and  this  skill  continu- 
ally increase;  and  as  the  limit  they  present  recedes,  the  range  of  our 
tastes  and  of  our  artificial  wants  increases  with  them. 

"There  are  other  important  respects  in  which  human  wants 
differ  from  those  of  the  inferior  animals.  In  addition  to  those 
primary  appetites  which  he  shares  with  the  humblest  living  creature, 
and  which  relate  exclusively  to  things,  man  has  also,  in  a  peculiar 


22  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

degree,  affections  which  relate  to  persons;  and  various  desires  which 
are  only  conceivable  with  reference  to  abstractions,  and  result  not 
from  any  physical  antecedent  but  from  operations  of  the  mind.  By 
the  aid  of  memory,  which  recalls  the  past;  and  of  imagination,  which 
represents  the  distant,  the  absent,  and  the  future;  and  of  reason, 
which  exercises  a  judgment  upon  the  utility  present  or  prospective 
of  an  object,  and  upon  the  means  of  obtaining  it,  man  forms  desires 
concerning  his  personal  safety,  his  family,  and  his  property.  These 
desires,  like  those  already  described,  become,  by  the  force  of  habit, 
daily  more  persistent  and  intense.  To  this  class  of  desires  no  limit 
can  be  assigned  other  than  the  mental  powers  of  each  individual. 
These  wants,  except  those  relating  to  the  family,  might  arise  in  a 
man  isolated  from  all  other  beings  of  the  same  kind.  But  man  is  by 
the  constitution  of  his  nature  a  social  being.  Beginning  with  the 
family,  he  soon  forms  relations  with  other  men,  and  lives,  and  moves, 
and  has  his  being  in  society.  Hence  arise  new  desires,  each  of  which, 
like  every  other  desire,  is  intensified  and  confirmed  by  habit.  Man 
is  imitative,  and  so  seeks  to  have  what  his  neighbor  enjoys;  he  is  vain, 
and  so  desires  to  display  himself  and  his  possessions  with  advantage 
before  his  fellows;  he  loves  superiority,  and  so  seeks  to  show  some- 
thing that  others  have  not;  he  dreads  inferiority,  and  so  seeks  to 
possess  what  others  also  possess.  Hence  it  is  that,  as  daily  experience 
teaches  us,  no  man  ever  attains  the  state  in  which  he  has  no  wish 
ungratified.  The  greater  the  development  of  the  mental  and  moral 
faculties,  the  greater  will  be  the  number  of  desires;  the  more  con- 
tinuous the  gratification  of  these  desires,  the  more  confirmed  will  be 
the  habit. 

"Not  merely  is  the  amount  of  human  desire  indefinite,  but  the 
modes  in  which  desire  in  many  different  individuals  is  manifested 
are  equally  without  any  practical  limit.  Even  in  the  primary  appe- 
tites there  is  room  for  great  diversity,  according  to  differences  of 
climate,  age,  sex,  and  other  considerations,  in  the  choice  of  food,  and 
the  construction  of  houses,  and  the  fashion  of  clothes.  In  the  desires 
which  are  peculiar  to  man  we  seldom  find  agreement.  The  diversity 
of  individual  tastes  is  proverbial.  Two  persons  will  often  regard  with 
very  different  feeling  the  same  object.  The  same  man  will  at  different 
times  and  in  different  circumstances  experience  great  changes  in  his 
desires  and  his  aversions. 

"According,  then,  to  the  degree  with  which  we  are  acquainted 
with  external  objects,  and  to  the  power  that  we  possess  of  judging  of 


WANTS  AND  MEANS  OF  SATISFACTION 


23 


their  relations  to  ourselves  and  to  other  things,  our  capacity  of  desire 
will  be  extended.  It  therefore  depends  upon  the  education,  in  the 
widest  sense  of  that  term,  of  each  individual,  and  upon  his  character 
as  mainly  resulting  from  that  education,  how  many  and  what  kinds 
of  objects,  and  with  what  degree  of  persistency,  he  desires.  The 
more  complete  the  intellectual  development,  the  wider  will  be  the 
field  of  desire;  and,  by  the  usual  reaction  in  our  mental  nature,  the 
wider  the  field  of  desire,  the  stronger  will  be  the  inducements  to 
intellectual  effort  for  the  continuance  of  means  to  gratify  these 
desires. 

"Nothing,  therefore,  can  be  further  from  the  truth  than  the 
ascetic  doctrine  of  the  paucity  and  the  brevity  of  human  wants.  So 
far  from  man  wanting  little  here  below,  his  wants  are  indefinite,  and 
never  cease  to  be  so  during  his  whole  existence." 

Certain  very  obvious  and  very  important  consequences  flow  from 
the  above-described  characteristic  of  human  wants.  Here,  in  large 
part,  he  the  motives  to  acquisition  and  to  progress.  Here  in 
large  part,  is  the  why  of  the  endless  variety  and  increasing  struggle 
of  our  modem  industrial  society. 

2.  Provided  no  change  occurs  in  the  consumer  and  provided  time  for 
physical  recuperation  from  stimuli  is  not  permitted,  any  single  want  is 
capable  of  being  sated.  As  added  units  of  the  desired  good  are  con- 
sumed, a  continual  diminution  of  satisfaction  per  unit  occurs.  Sooner 
or  later  the  point  of  satiety  is  reached.  Under  the  conditions  here 
assumed  the  second  unit  of  a  good  (say,  an  orange)  gives  less  satis- 
faction than  did  the  first;  the  third  gives  less  satisfaction  than  did 
the  second,  and  so  on  to,  and  even  beyond,  the  point  of  zero-satis- 
faction. In  many  texts  this  fact  is  illustrated  by  some  such  diagram 
as  that  in  figure  A  where  the  diminishing  heights  of  the  successive 


.a 


*M 

•a 

a 

A   . 

R 

fl 

0 

•a 

J3 

.9 

^ 

I 

2 

_i_ 

4 

5 

6 

7 

Unit 

5C0I 

isum 

ed 

Units  consumed 


24 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


rectangles,  from  left  to  right,  are  supposed  to  represent  the  diminish- 
ing amounts  of  satisfaction  derived  from  successive  units  of  some  good. 
In  figure  B,  the  same  proposition  is  illustrated  by  a  "curve  of  descend- 
ing utility,"'  instead  of  separate  rectangles. 

Naturally,  so  far  as  we  consciously  distinguish  the  different 
intensities  of  different  wants,  we  tend  to  satisfy  our  most  pressing 
wants  first  and,  equally  naturally,  we  tend  to  apply  our  expenditures 
to  all  our  wants  in  such  a  way  as  to  secure  equal  marginal  utility, 
so-called,  from  each.  That  is,  we  try  to  continue  our  consumption 
of  no  commodity  so  far  that  the  last  unit  consumed  affords  less  satis- 
faction than  might  have  been  secured  by  an  equal  expenditure  for 
some  other  commodity.  Here  again  an  illustration  ser^^es  us  to  good 
advantage.  In  the  following  table  the  Roman  numerals  I- VI  denote 
six  different  commodities,  in  the  order  of  their  importance  to  a  given 
consumer.  The  Arabic  numerals  indicate  the  intensity  of  satisfaction 
to  be  derived  from  the  consumption  of  the  first,  second,  third,  or  sub- 
sequent unit  of  each  specified  commodity. 


COMMODITTf 

I 

U 

ni 

IV 

V 

VI 

Satisfaction  derived  from  ist  unit  consumed 

ID 

9 

8 

7 

6 

5 

u                       «               «        2(1        "                 " 

9 

8 

7 

6 

5 

4 

«      3d      « 

8 

7 

6 

5 

4 

3 

•                 •           ■      4th    « 

7 

6 

S 

4 

3 

2 

•                •          ■      5th    «            • 

6 

5 

4 

3 

2 

I 

■                 •           •      6th    « 

5 

4 

3 

2 

I 

o 

•                 ■           •      7th    " 

4 

3 

2 

I 

o 

m                 «           .      g^ij    « 

3 

2 

I 

O 

■                         •                ■        Qth      « 

2 

I 

O 

■                     •             ■     lOth     " 

I 

o 

■    nth    " 

O 

Assume,  now,  that  the  same  expenditure  is  necessary  to  secure 
any  one  imit  of  any  commodity.  If,  then,  a  person  is  in  a  position 
to  secure  only  a  single  imit,  he  will,  under  the  stated  conditions,  pre- 
sumably take  a  unit  of  commodity  I  and  derive  a  satisfaction  of  lo. 
However,  if  two  units  may  be  had,  two  units  of  I  or  one  unit  each  of 
I  and  II  offer  equal  satisfaction.  A  person  choosing  three  units 
would  select  two  units  of  I  and  one  of  II.    The  fourth  unit  to  be 

'  The  term  utility  has  here  its  conventional  economic  sense  of  capacity  to 
satisfy  want.  "^ 


WANTS  AND  MEANS  OF  SATISFACTION  25 

chosen  might  be,  indifferently,  a  third  unit  of  I,  a  second  tinit  of  II, 
or  a  unit  of  III — and  so  on. 

We  must  not  permit  the  table  to  mislead  us,  however.  It  is  a 
dangerous  illustration  in  two  or  three  particulars.  If  carried  out  to 
want  X  or  XI  it  would  seem  to  imply  that  the  sum  total  of  hmnan 
wants  could  be  sated,  and  this  we  know  to  be  impossible.  Again, 
if  these  figures  were  charted,  the  curve  of  descending  utility  would 
come  down  at  the  same  angle  for  all  wants.  This  is  of  course  not  the 
case  in  actual  life.  The  curve  of  utility  obviously  descends  more 
rapidly  in  the  case  of  cook-stoves  than  in  the  case  of  slices  of  bread. 
Another  way  of  stating  this  is  to  say  that  desire  is  more  elastic  in  the 
case  of  slices  of  bread  than  in  the  case  of  cook-stoves.  Finally,  we 
must  not  suppose  that  anyone  can  really  measure  satisfactions  in  any 
such  definite  way  as  is  here  assumed  in  using  the  Arabic  numerals. 
It  must  be  kept  in  mind  that  an  illustration  is  not  a  demonstration, 
and  that  a  table  or  chart  used  to  illustrate  one  feature  of  a  subject 
may  be  a  faulty  illustration  of  another  feature. 

What  consequences  flow  from  the  above  statements?  A  few  of 
the  consequences  are  here  listed  and  the  student  is  asked  to  show 
how  and  why  these  consequences  do  flow. 

a)  With  an  increased  output  of  a  given  good  its  price  tends  to 
fall,  other  things  remaining  the  same. 

h)  If  the  output  of  several  goods  should  be  increased  at  the  same 
rate  the  prices  might  fall  at  different  rates. 

c)  Diversity  or  variety  of  expenditure  occurs. 

d)  In  part,  here  is  an  explanation  of  how  it  happens  that  a  cer- 
tain amount  of  social  energy  is  devoted  to  the  production  of  good  x 
and  a  certain  other  amount  to  the  production  of  good  y.  In  other 
words,  here  is  part  of  the  explanation  of  the  distribution  of  land, 
labor,  and  capital  among  the  various  activities  of  society. 

3.  The  present  estimation  of  the  utility  of  a  future  good  is  less  than 
the  present  estimation  of  the  utility  of  a  present  good,  assuming  no  change 
in  either  quantity  or  quality  of  the  good.  If  you  were  asked  whether 
you  preferred  to  have  a  unit  of  x  today  or  three  years  hence,  under 
the  conditions  above  assumed,  your  decision  would  be  to  receive  it 
today.  There  are  uncertainties  in  life;  you  might  not  live  the  three 
years;  your  wants  might  change;  three  years  hence  is  a  "long  time 
off."  Of  course,  if  a:  is  a  bottle  of  grape  juice,  it  might  be  preferred 
three  years  hence  as  wine,  but  in  that  case  a  change  in  quality  has 
occurred.     Equally,  of  course,  if  a;  is  now  plentiful  and  you  have 


26 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


reason  to  know  that  x  vnW  be  scarce  three  years  hence,  you  might 
vote  to  defer  present  consumption,  but  in  that  case  a  change  in 
quantity  has  occurred. 

The  proposition  here  before  us  has  been  illustrated  by  the  follow- 
ing diagram: 


Present  Estimation  of 

Present  Estimation  of 

Present  Good 

Future  Good 

«J 

"3 

d 

u 

its 

21 

s 

a 

.2 

K 

u 
:0 

o 

1 

.9 
o 

^ 

J2 

4-> 

r) 

(/] 

I 

3 

3 

4 

s 

I 

2 

3 

NumI 

XT  of  I 

jnits 

Number  of  units 

If  this  proposition  be  true,  should  we  have  reason  to  expect  that 
society  might  have  occasion  to  induce  some  of  its  members  to  save 
by  paying  them  interest  on  their  savings  ? 

4.  Our  wants  are  often  imposed  upon  us  by  the  force  of  imitation 
and  by  social  standards.  The  gregarious  instinct  is  powerful.  We  move 
in  herds.  We  buy  hats  and  clothing  at  Easter.  We  buy  extensively 
at  Christmas.  Teddy  bears  become  the  rage  and  as  suddenly  are 
supplanted  by  some  new  fad.  The  tulip  craze  aflfects  the  industry  of 
a  whole  country.    And  so  examples  without  limit  may  be  heaped  up. 

The  economist,  however,  is  mainly  interested  in  the  economic 
consequences  of  these  characteristics  of  our  wants.  Some  of  the 
consequences  of  this  particular  characteristic  may  be  stated  as  follows: 

a)  An  explanation  of  the  magnitude  of  some  of  our  industrial 
phenomena. 

b)  Great  social  saving  through  the  economies  of  large  scale  pro- 
duction. 

c)  Great  social  waste  of  machinery,  goods,  and  established 
industrial  and  commercial  connections  when  a  shifting  of  taste  occurs. 

d)  A  partial  explanation  of  such  phenomena  as  rush  work, 
sweated  industries,  and  overcrowding. 

e)  A  partial  explanation  of  the  growth  of  cities. 


WANTS  AND  MEANS  OF  SATISFACTION  2^ 

5.  Our  subjective  estimate  of  satisfactions  is  continually  shifting. 
1  may  have  in  mind  such  a  table  of  satisfactions  as  was  used  under  2, 
above,  and  a  word  from  you,  an  advertisement  read,  a  look  at  a 
show  window,  or  any  one  of  a  thousand  other  things,  trivial  or  impor- 
tant, may  change  the  table.  With  the  lapse  of  time  the  case  is  even 
more  striking.  We  change  as  a  result  of  every  factor  of  our  environ- 
ment, by  education,  by  travel,  by  association,  even  by  the  very  process 
of  consuming  goods. 

Since  industry  caters  to  wants,  it  follows  that  there  will  be  a 
continual  shifting  in  industry  and  that  a  person  engaged  in  supplying 
the  means  of  satisfaction  of  these  wants  will  assume  risks  and 
chances  quite  independent  of  the  risks  of  climate,  fire,  or  accident. 
It  need  not  surprise  us  to  find  that  men  must  be  rewarded  to  induce 
them  to  incur  these  risks. 

In  all  the  above,  little  was  said  concerning  the  why  of  wants. 
This  is  a  problem  for  the  psychologist  rather  than  the  economist.  It 
is  referred  to  at  this  point  merely  to  emphasize  the  fact  that  the 
economist  is  making  no  arbitrary  assumptions  in  this  matter.  Wants 
may  be  and  are  the  results  of  instincts,  reason,  suggestion,  habits,  and 
a  thousand  other  things.  Be  all  that  as  it  may,  the  significant  thing 
for  the  economist  is  that  the  motivation  of  economic  actions  is  to  be 
foxmd  in  wants.  The  purpose  of  this  survey  is  solely  to  cause  the 
student  of  economics  to  feel  that  the  curtain  has  been  pulled  aside 
and  that  a  view  has  been  given  of  some  of  the  real  forces  actuating 
industrial  society, 

7.  THE  APPORTIONMENT  OF  EXPENDITURES' 

Dr.  Ernst  Engel,  in  1857,  compared  the  budgets  in  Le  Play's 
famous  "Family  Monographs,"  added  data  of  his  own,  and  formu- 
lated his  schedule  of  the  normal  distribution  of  expenditures  in  their 
relation  to  income. 

From  Table  i  (p.  28)  Engel  deduced  four  famous  laws: 

1.  The  larger  the  income  of  a  family,  the  smaller  is  the  percentage 
of  it  expended  for  food. 

2.  The  percentage  of  expenditure  for  clothing  remains  approxi- 
mately the  same  for  the  larger  incomes  as  for  the  smaller. 

3.  With  all  the  incomes  investigated,  the  percentage  of  expendi- 
ture for  rent,  fuel,  and  light  remains  invariably  the  same. 

'  Adapted  from  F.  H.  Streightofif,  The  Standard  of  Living  among  the  Industrial 
People  of  America,  pp.  12-23.     Houghton  Mifflin  Co.,  1911. 


28 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Table  I 

Engel's  Table  of  Proportionate  Expenditures 

The  figures  show  for  families  with  the  stated  incomes  what  percentage 
of  total  expenditure  goes  for  each  of  the  specified  purposes. 


Object 


Subsistence 

Clothing 

Lodging 

Firing  and  lighting  ... 

Education,  religion,  etc 

Legal  protection 

Care  of  health , 

Comfort,  recreation .  . . , 


$22S-$30O 


62 
16 
12 

5. 

2 
I 
I 
I 


95 


Fauily  Incoux 


$450-9600 


55' 

li 

12 

5. 

35 

2 

3 

2-5- 


90 


10 


$7SO-$i,ooo 


50' 
18 
12 
S, 

5-5 
3 
3 
35/ 


8S 


IS 


4.  The  larger  the  income,  the  larger  is  the  percentage  expenled 
for  education,  health,  recreation,  amusement,  etc. 

The  brilliant  work  of  this  German  statistician  was  confirmed  in 
the  main  by  the  early  work  in  America.  The  Massachusetts  Labor 
Report  for  1885,  for  instance,  contained  the  schedule  embodied  in 
Table  II. 

Table  II 

Expenditures  in  Workingmen's  Families  in  Massachusetts,  1885* 

The  figures  show  for  families  with  the  stated  incomes  what  percentage  of  total 
expenditure  goes  for  each  of  the  specified  purposes. 


Object 


Subsistence . 
Clothing.  .  . 

Rent 

Fuel 

Sundries.  .  . 


Family  Incoue 


$300 
to 

$450 


64' 

7 

20  I 
6 
3 


97 


$450 

to 
$600 


63 
10  5 
15  5 
6 


95 


$600 
to 

$7S0 


60' 

14 

14 

6- 

6 


94 


$7  so 

to 
$1,300 


56' 
15 

17 

6 


94 


Above 

$I,300 


51 
19 

15 

5 

10 


90 


'Sixteenth  Report  of  the  Bureau  of  Statistics  of  Labor,  Massachusetts  (1885),  p.  15a. 

It  will  be  noticed  that  in  1885,  in  America,  a  larger  share  of 
income  was  absorbed  by  the  subsistence  wants,  less  being  left  for 
sundries — education,  health,  recreation,  and  amusements.  Two  other 
facts,  however,  are  particularly  significant:  whereas  the  Belgian 
or  German  outlay  for  lodging  remained  constant  at  12  per  cent  as 


WANTS  AND  MEANS  OF  SATISFACTION 


29 


the  income  increased,  American  rents  fell  from  20  per  cent  to  15  per 
cent  of  the  expenditure;  second,  as  they  became  more  prosperous, 
Americans  enlarged  their  relative  expenditure  for  clothing.    This 

Table  III 

Expenditures  in  Workingmen's  Famiues  in  Massachusetts,  1901* 

The  figures  show  for  families  with  the  stated  incomes  what  percentage  of  total 

expenditure  goes  for  each  of  the  specified  purposes. 


Family  Income 

Object 

Less 

than 
$450 

$4SO 
to 

$600 

$600 
to 

$750 

$7SO 

to 

1,300 

Above 
$1,200 

Subsistence 

56. 
21.96 

9-iS 
7.91 

54-89 

17-54 

11.69 

6.91 

53-30 
17-27 

11.68 
6.75 

53-18 

11-03 

14.66 

5-39 

54-87 

Rent 

6.80 

Clothing 

14.62 

Fuel  and  lighting 

4-49 

Education,  church,  etc.  . . . 

Health,  insurance 

Sundries 

95-02 

1. 61 

3.98 

•39 

91.03 

3.93 
4-69 
1.36 

89.00 

3-99 
3-98 
3-03 

84.26 

4-12 

5.06 
6.56 

80.78 

4-58 

6.39 
8.2s 

Total  aver,  expenditure. . 

4.98 

$382.49 

8.97 
$555  53 

11.00 
$688.87 

15-74 
$886.50 

19.23 

$1,252.59 

'Thirty-second  Report  of  the  Bureau  of  Statistics  of  Labor,  Massachusetts  (xgoi),  pp.  «96-97. 

might  have  indicated  extraordinarily  high  rents  in  Massachusetts, 
or  very  great  lack  of  good  clothing  in  the  lower  income  groups,  or 
both.  The  condition  in  1901,  however,  was  much  more  favorable  to 
the  Massachusetts  working  people,  as  the  proportion  of  expenditure 
devoted  to  existence  wants  had  fallen  in  every  income  group  from 
2  to  6  points,  the  gain  being  largely  in  reduced  food  costs.  Still  the 
expenses  for  clothing  increased  with  the  income,  but  not  so  exces- 
sively as  in  1885;  rents  were  still  inordinately  high,  and  the  relative 
cost  of  lighting  had  begim  to  fall  as  Income  grew.  (See  Table  III.) 
The  Americans  were  by  that  time  more  liberal  in  their  expenditures 
for  health  and  insurance  than  were  the  Germans. 

Charts  I,'  II,»  and  IIP  form  an  epitome  of  the  subject  of  budgets 

'  Plotted  from  data  on  p.  55  of  Mrs.  L.  B.  More's  Wage-Earner's  Budgets. 

*  Plotted  from  data  on  p.  70  of  R.  C.  Chapin's  The  Standard  of  Living  in  New 
York  City. 

*  Plotted  from  data  on  p.  loi  or  585  of  the  Eighteenth  Annual  Report  of  the 
United  States  Commissioner  of  Labor. 


30 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


as  presented  in  the  three  studies  mentioned  in  the  note.  It  is  inter- 
esting to  observe  that  in  no  case  docs  the  expenditure  for  food  reach 
51  per  cent:  in  other  words,  American  workingmcn  now  find  food  a 
much  less  pressing  claimant  of  their  resources  than  did  Engel's  sub- 
jects, or  even  the  people  of  Massachusetts,  in  18S5.  Another  inter- 
esting fact  is  that  after  the  income  of  $600  is  reached,  the  relative 
expensiveness  of  food  wants  diminishes  rapidly  in  the  United  States  as 
a  whole,  though  in  New  York  City  there  is  little  gain  in  that  respect. 

Chart  I 


Family  Income: 

$200        $400 

$soo 

$600 

$700 

$800 

$QOO 

$  1 ,000 

$1,200 

to            to 

to 

to 

to 

to 

to 

to 

to 

400          500 

600 

700 

800 

900 

1,000 

1,200 

1,500 

Per  cent  of  total  expenditures  made  for  various  purposes  by  200 
New  York  City  families  in  relation  to  size  of  income 


SO% 

45% 


40% 


35% 
30% 

25% 
20% 

15% 
10% 

5% 
0% 


food  there  absorbing  proportionately  less  of  the  low  incomes  and  more 
of  the  high  ones.  Again,  there  is  something  sinister  in  the  enormous 
excess  of  rent  paid  in  New  York  City,  especially  by  families  of  small 
resources.  Whereas  the  average  outlay  for  rent  in  the  income  group 
$40o-S5oo  in  the  city  is  $120  or  $125,  that  in  the  country  as  a  whole  is 
$86 .  54.  Dr.  Chapin  explains  this  phenomenon  on  the  ground  that 
exorbitantly  high  rents  in  the  mctropoUs  force  people  who  live  there 
to  consider  shelter  almost  their  prime  want.     It  is  a  peculiarity  of 


WANTS  AND  MEANS  OF  SATISFACTION 


31 


New  York  City  that,  as  their  incomes  grow  larger,  most  families 
instead  of  seeking  better  quarters  have  to  be  content  with  a  minimum 
of  improvement  in  their  houses,  and  are  constrained  to  devote  their 
additional  resources  largely  to  the  purchase  of  food.  It  may  be 
interesting  to  note  that  at  the  recent  Berlin  City  Plan  Exhibit  it 
appeared  that  many  families  in  the  1 200-1 500  marks  income  group  in 
Schoneberg  paid  about  one  half  their  money  for  rent,  and  that  the  per- 
centage expenditure  for  housing  falls  off  in  the  higher  and  lower  groups. 

Chart  II 
Family  Income: 


$400 

$500 

$600 

$700 

$800 

$  900 

$1,000 

$1,100 

$1,200 

to 

to 

to 

to 

to 

to 

to 

to 

to 

Soo 

600 

700 

800 

900 

1,000 

1,100 

1,200 

1,300 

Per  cent  of  total  expenditures  made  tor  various  purposes  by  391 
New  York  City  families  in  relation  to  size  of  income 


50% 
45% 
40% 
35% 
30% 

25% 
20% 

15% 
10% 

5% 
0% 


In  general,  as  prosperity  grows,  clothing  is  awarded  a  constantly 
increasing  proportion  of  income,  though  among  the  more  well-to-do 
families,  especially  among  those  whose  accoimts  were  recorded  in  Dr. 
Chapin's  tables,  there  is  a  slight  decrease  in  the  per  cent  of  outlay 
for  raiment.  When  a  man  is  very  poor,  his  first  necessities  are  food 
and  a  safe  place  in  which  to  sleep.  After  both  of  these  wants  have 
been  supplied,  he  can  devote  his  efforts  to  satisfying  other  desires. 
His  hunger  he  can  conceal;  he  can  escape  temporarily  from  squalid 


32 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


home  surroundings;  but  he  cannot  so  easily  rid  himself  of  his  rags — 
the  badges  of  his  poverty.  So  pride  prompts  him  to  secure  better 
clothes  as  soon  as  his  resources  will  permit  him  to  do  so.  Fuel  and 
lighting  expenses  slowly  decline,  and  outlay  for  sundries  rapidly  rises 
in  importance  as  incomes  become  more  ample. 

Engel's  laws,  then,  need  considerable  modification  before  they  can 
be  applied  to  American  workingmen  of  the  present  time.    On  the  basis 

Chart  III 
Faahly  Income: 


Under    $200      $300    $400 
to  to        to 

$200        300        400       500 


$500      $600    $700    $800      $Qoo    $1,000    $1,100  Over 
to  to         to         to  to  to  to 

600        700       800       900       1,000      I, ICO      1,200  $1,200 


Per  cent  of  total  expenditures  made  for  various  purposes  by  11,156  normal 
families  throughout  the  United  States  in  relation  to  size  of  income 

"^ 

■           " 

_££o 

^ 

^^ 



+- 

^-■ 

^-.'- 



.-'' 

i^. ■ 

THC  n 

^^^ 

■ ■ 

- 

^  ^^ 

-~. 

— 

Ligb 

t  f  r{A 

ei 

• 

50% 
45% 
40% 
35% 


30% 


^5% 


20% 


T  'Of 

I  0/0 


10% 


5% 


0% 


of  the  special  investigations  here  cited  they  may  be  tentatively  restated 
thus : 

As  the  income  increases: 

1.  The  proportionate  expenditure  for  food 

a)   decreases  for  the  country  at  large  from  50  per  cent  to  37 

per  cent,  but 
Z»)  in  New  York  City,  it  amounts  to  almost  45  per  cent  of  the 

total  outlay  until  an  income  of  $1,000  is  attained. 

2.  There  is  a  strong  tendency  for  the  percentage  of  expenditure  for 

clothing  to  increase. 


WANTS  AND  MEANS  OF  SATISFACTION  33 

3.  Relative  expenditures  for  housing 

a)  remain  about  constant  for  the  country  at  large,  falling  very 
shghtly  after  $400  incomes  have  been  reached,  but 

h)  decrease  rapidly  from  30  per  cent,  or  more,  to  16  per  cent 
in  New  York  City. 

4.  Proportionate  expenditures  for  fuel  and  light  decrease. 

5.  Expenditure  for  culture  wants  increases  absolutely  and  rela- 

tively. 

8.   THE  STANDARD  OF  LIVING' 

Satisfactorily  to  define  the  standard  of  living  is  extremely  difficult. 
Professor  Charles  J.  Bullock,  for  instance,  writes:  "Each  class  of 
people  in  any  society  is  accustomed  to  enjoy  a  greater  or  less  amoimt 
of  the  comforts  or  luxuries  of  life.  The  amount  of  comforts  or 
luxuries  customarily  enjoyed  by  any  class  of  men  forms  the  '  standard 
of  living '  of  that  class."  That  is  to  say,  the  standard  of  living,  as  the 
expression  is  usually  understood,  consists  simply  of  what  men  actually 
do  enjoy.  On  the  other  hand,  there  always  are  felt  but  unsated  wants 
that  prompt  men  to  struggle  for  higher  wages;  these  reasonable 
unfilled  desires  are  the  motive  power  of  progress.  Few  indeed  are 
the  women  who  do  not  confidentially  whisper  to  their  friends:  "We 
cannot  do  that  now,  for  we  are  rather  poor  this  year."  An  inborn 
spirit  of  emulation  prompts  each  to  envy  the  pleasures  of  his  more 
fortunate  neighbor;  thus  there  is  an  "ideal"  standard  of  living  which 
is  always  in  advance  of  achieved  satisfaction. 

Professor  Bullock's  definition  is  particularly  valuable  in  suggest- 
ing two  important  truths.  First,  it  properly  emphasizes  comforts  and 
luxuries.  "If  we  are  to  judge  by  his  expenditure,  the  workingman 
may  graduate  his  wants  thus:  bread  and  meal,  house,  liquor,  tea, 
tobacco,  clothes,  meat."  The  fact  is  that  in  everyday  affairs  effort 
is  often  directed  more  to  securing  superfluities  than  to  providing 
necessities:  for  example,  it  is  said  on  good  authority  that  a  large 
percentage  of  recent  real  estate  mortgages  in  New  York  have  been 
given  that  the  owners  of  the  property  might  purchase  automobiles. 
In  the  second  place,  the  extent  and  content  of  the  unsated  wants  in  a 
man's  ideal  standard  is  largely  determined  by  actual  satisfactions. 
This  truth  is  emphasized  by  Mr.  Frank  Tucker  when  he  says:  "A 
standard  of  living  is  a  measurement  of  life  expressed  in  a  daily  routine 

'  From  F.  H.  Streightoff,  The  Standard  of  Living  among  the  Industrial  People 
of  America,  pp.  2-8.    Houghton  Mifl3in  Co.,  1911. 


34  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

which  is  determined  by  income  and  conditions  imder  which  it  is 
earned,  economic  and  social  environment,  and  the  capacity  for 
distributing  the  income." 

Having  noted  these  fundamental  principles,  it  is  possible  to  take 
another  step.  Each  individual  has  his  own  more  or  less  rational 
concept  of  what  is  essential  to  the  maintenance  of  his  own  social 
position;  and  he  knows  exactly  what  this  position  is,  whether  he  be 
the  bank  clerk  who  delights  in  horse-races,  or  the  man  who  shares  the 
same  desk  and  plays  on  his  Sunday-school  ball  team.  The  one  de- 
mands "smart"  raiment  and  amusement  at  high  nervous  tension,  the 
other  wants  respectable,  serviceable  clothes  and  healthy  sport.  They 
live  in  different  worlds,  they  have  individual  criteria:  so  each  man 
has  his  own  standard  of  living.  But  it  will  be  noted  that  the  bank 
clerks  as  a  class  have  some  wants  in  common  in  contrast  to  the 
mechanics,  for  instance.  The  clerks  must  enter  their  offices  clean- 
shaven, the  mechanics  like  a  good  scrub  after  work;  the  former  wear 
kid  gloves  and  fresh  linen,  the  latter  are  more  comfortable  in  woolen 
gloves  and  flannel  shirts.  These  contrasts  and  comparisons  can  be 
extended  until  the  standards  of  each  group  have  been  determined  with 
considerable  precision.  Thus  the  class  standard  of  living  may  be 
compared  to  a  composite  photograph;  certain  features  are  empha- 
sized, while  others  are  faint  or  blurred  according  to  the  proportion  of 
individuals  possessing  the  character — or  feeling  the  want.  On  the 
other  hand,  development  of  the  individual  is  so  largely  influenced  by 
his  environment  that  his  notions  are,  in  the  main,  those  of  his  class. 
So  the  class  standard  of  living  is  the  product  of  the  ideals  and  resources 
of  its  members,  and,  in  turn,  modifies  their  criteria. 

But  class  is  not  the  only  factor  within  the  community  in  the 
development  of  the  individual's  ideal  standard  of  living.  Aside  from 
its  large  determining  influence  in  the  matter  of  class  membership, 
income  has  an  important  part  to  play;  purchasing  power  limits  the 
quahty  and  quantity  of  obtainable  satisfactions.  As  little  Tommy 
wants  to  be  like  Big  Brother,  and  Big  Brother  envies  the  prowess  of 
the  butcher-boy,  so  the  smelting  hand  feels  the  desires — not  of  the 
president  of  the  Steel  Trust — but,  say,  of  his  foreman,  the  nearest 
person  whom  he  sees  enjoying  just  a  little  more  distinction,  just  a 
little  more  material  wealtli  than  he.  So  the  individual's  ideal  is 
limited  by  his  income;  the  higher  he  climbs  on  the  ladder  of  success, 
the  wider  is  his  view;  the  more  he  sees,  the  more  he  seeks. 

Another  determinant  of  the  standard  of  living  is  the  progress  of 


WANTS  AND  MEANS  OF  SATISFACTION  35 

civilization.  Professor  John  G.  Brooks  quotes  a  Cape  Cod  captain 
as  follows:  "My  father  wanted  fifteen  things.  He  didn't  get  'em  all. 
He  got  ten  and  worried  considerable  because  he  didn't  get  the  other 
five.  Now  I  want  forty  things,  and  I  get  thirty,  but  I  worry  more 
about  the  ten  that  I  cannot  get  than  the  ole  man  used  to  about  the 
five  he  couldn't  get."  The  modem  carpenter  has  far  more  comfort 
than  Richard  II  dreamed  of,  simply  because  progress  has  put  new 
things  within  his  reach — created  new  utilities  and  new  wants — but 
the  carpenter  knows  that  there  are  many,  many  things  that  he  cannot 
have.  Thus  there  is  a  constant,  though  irregular,  rise  of  the  standard 
of  living  as  civilization  becomes  more  complex.  The  standard,  then, 
is  a  result  of  two  forces,  environment,  comprising  time,  income,  and 
class,  and  individuality. 

It  will  not  do,  however,  to  leave  the  problem  at  this  point.  As 
the  standard  determines  the  manner  of  living,  it  is  important  to 
distinguish  between  worthy  and  imworthy,  or  high  and  low  standards. 
It  may  reasonably  be  doubted  whether  the  standards  of  the  very  rich 
are  ideally  any  higher  than  those  of  industrial  workers.  A  dinner 
given  by  one  of  the  exclusive  four  hundred  with  a  monkey  as  the 
guest  of  honor  is  no  more  justifiable  than  the  practice  of  the  "wash- 
lady"  who  displays  the  gold  fillings  in  her  false  teeth.  Both  are 
useless,  if  not  positively  harmful;  they  are  evidence  of  low  or  unworthy 
ideals.  A  normal  standard  of  living,  on  the  other  hand,  is  one  which 
conduces  to  healthy  symmetrical  development,  physical,  mental,  and 
moral.  The  standard  is  properly  counted  ideally  high  in  proportion 
as  it  achieves  this  end,  and  especially  as  its  emphasis  falls  upon  the 
intellectual  and  moral  elements. 

What,  then,  is  the  content  of  the  lowest  tolerable  standard  of 
living  ?  In  the  first  place,  there  must  be  food,  clothing,  and  shelter 
sufl&cient  to  maintain  economic  efficiency.  Even  those  persons  who 
believe  that  the  sole  end  of  existence  is  production  must  grant  this 
proposition,  at  least  in  its  general  application.  Under  shelter  is 
included  light,  fuel,  and  necessary  furniture.  If  economic  efficiency 
is  to  be  preserved,  there  must  be  provision  against  sickness  and  im- 
employment;  for,  unless  his  strength  is  maintained  during  idleness, 
when  he  returns  to  work  the  individual  is  unfit  for  his  stint.  More- 
over, the  man's  standard  must  include  a  family,  else,  in  a  generation, 
production  will  cease. 

But  this  view  of  the  purpose  of  man  is  far  too  narrow.  Few 
people  would  today  have  the  hardihood  to  deny  that  man's  life  should 


36  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

contain  the  largest  possible  amounts  of  wholesome  pleasure.  "One 
of  the  strongest  human  wants  is  the  desire  for  the  society  of  one's 
fellows."  This  means  that  with  a  normal  standard  of  living  the  house 
should  contain  a  room  fit  for  entertainment  of  company,  that  the 
family  should  have  clothes  which  will  enable  them  to  appear  in  public 
without  shame,  and  that  the  routine  should  include  some  leisure  for 
polite  intercourse.  Still  if  man  is  to  be  an  end  in  himself  he  must 
have  more  than  this;  he  needs  some  education,  books,  pictures,  and 
wholesome  recreation;  he  must  have  time  for  the  home  life  that 
Colonel  Roosevelt  calls  "the  highest  and  finest  product  of  our  civili- 
zation." A  little  boy  once  defined  home  as  "  the  place  where  mother 
is."  From  the  viewpoint  of  the  child's  welfare,  this  youngster 
undoubtedly  hit  upon  the  significant  fact.  Modern  scientific  charity 
as  well  as  the  Christian  religion  recognizes  a  very  real  social  value  in 
the  home.  It  is  probably  this  which  is  in  the  mind  of  Professor  John 
A.  Ryan  when  he  writes  that  the  wife  should  not  be  a  wage-earner, 
thus  implying  that  the  father  should  support  the  family.  Beside 
all  these  things,  a  normal  standard  of  living  contains  provision  for  all 
emergencies,  sickness,  accident,  unemployment,  and  death,  and  for 
material  advance — savings:  religion,  too,  should  be  in  the  routine. 
So  the  ideal  standard  of  living  demands  the  satisfaction  of  reasonable 
wants  of  both  body  and  intellect,  and  includes  an  ambition  to  improve. 
A  clear  understanding  of  what  the  standard  of  living  is  permits 
some  appreciation  of  its  significance.  In  the  first  place,  unless  the 
standard  includes  adequate  food,  clothing,  and  shelter,  health  will 
inevitably  suffer  and  the  race  will  degenerate  physically.  If,  on  the 
contrary,  men  obtain  a  proper  satisfaction  of  these  fundamental  wants, 
not  only  will  health  be  preserved  and  improved,  but  a  foundation 
will  be  laid  for  intellectual  progress.  A  step  farther  may  be  taken 
along  this  line:  unless  they  believe  that  their  descendants  will  be  able 
to  maintain  the  parental  standard,  men  will,  if  thoughtful,  refuse  to 
become  fathers.  Again,  if  women  would  rather  dress  showily  than 
enjoy  homes  of  their  own,  married  or  urmiarried,  they  will  refuse  to 
assume  the  burden  of  motherhood.  Thus,  in  two  distinct  ways,  the 
standard  of  living  tends  to  determine  population.  By  this  limiting  of 
propagation,  the  standard  of  living  limits  the  number  of  wage-workers, 
and  so,  if  high  enough,  it  can  change  the  ratio  of  supply  to  demand 
for  labor  and  thus  raise  compensation.  In  a  much  more  simple  and 
direct  way,  however,  the  desire  for  a  higher  standard  of  living  decides 
the  minimum  pay  demanded  by  trades  unions  and  operates  to  increase 


WANTS  AND  MEANS  OF  SATISFACTION  37 

earnings.  More  satisfactions  will  breed  new  wants,  yet  higher  wages 
will  be  sought,  and  so  the  process  will  continue.  In  this  way  the 
"ideal"  standard  of  living  is  the  key  to  the  material  progress  of  the 
industrial  classes. 

Moreover,  "in  most  cases  increased  wages  have  meant  the  grati- 
fication of  the  intellectual  and  artistic  sense  of  the  workers;  have 
meant  books  and  pictures;  have  meant  a  few  extra  rooms  in  the 
house  and  more  decent  surroundings  generally;  have  meant  a  few 
years  extra  schooling  for  the  children;  have  meant,  finally,  a 
general  uplifting  of  the  whole  working-class."  "The  encouraging 
part  of  the  whole  matter  is  this,  that  among  the  poor  there  is 
everywhere  the  intensity  of  purpose  that  causes  them  to  give  up 
material  things,  food  and  raiment,  and  go  hungry  and  shabby,  in 
order  to  secure  the  spiritual  things,  amusement,  education,  and  social 
relationship."  The  pursuit  of  a  higher  standard  of  living  is,  then,  the 
inspiration  of  intellectual  advance;  upon  it  depends  the  physical  and 
mental  and  moral  welfare  of  the  people,  the  development  of  the 
commonwealth.  Two  things,  therefore,  are  essential  to  the  progress 
of  a  nation:  first,  that  the  individuals  receive  so  much  material 
wealth  as  will  enable  them  to  satisfy  their  reasonable  wants,  and, 
second,  that  they  continually  discover  new  and  wholesome  desires. 

9.  A  NORMAL  STANDARD  OF  LIVING' 

Writers  on  social  questions  have  occasionally  assumed  certain 
round  sums  as  the  cost  of  maintaining  a  normal  standard  of  living. 
For  instance,  Edward  T.  Devine,  in  Principles  of  Relief,  1904,  p.  35, 
says: 

Recognizing  the  tentative  character  of  such  an  estimate,  it  may  be 
worth  while  to  record  the  opinion  that  in  New  York  City,  where  rentals  and 
provisions  are  perhaps  more  expensive  than  in  any  other  large  city,  for  an 
average  family  of  five  persons  the  minimum  income  on  which  it  is  practi- 
cable to  remain  self-supporting  and  maintain  any  approach  to  a  decent 
standard  of  living  is  $600  a  year. 

Professor  Albion  W.  Small,  head  of  the  departn\ent  of  sociology 
in  the  University  of  Chicago,  is  quoted  as  having  said  in  a  lecture: 

No  man  can  live,  bring  up  a  family,  and  enjoy  the  ordinary  human 
happiness  on  a  wage  of  less  than  $1,000  a  year. 

•  Adapted  from  the  Report  of  the  [Massachusetts]  Commission  on  the  Cost  of 
Living  (1910),  pp.  594-97- 


3« 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


John  Mitchell,  formerly  vice-president  of  the  American  Federation 
of  Labor,  has  said  that  the  min^vmi  wage  that  will  maintain  a  working- 
man  and  his  family  according  to  the '  'American  standard ' '  is  $600  a  year. 

None  of  these  estimates  gives  us  any  of  the  details  from  which  the 
generalization  has  been  arrived  at,  and  none,  except  that  of  Dr. 
Devine,  gives  unit  and  locality.  It  is  evident  that  the  minimum 
income  necessary  to  maintain  a  normal  standard  of  living  will  vary 
considerably  in  different  places,  because  of  the  differences  in  living 
conditions,  prices,  wages,  rents,  social  life,  opportunities  for  recreation, 
etc.  As  conditions  in  the  same  locality  are  changing  from  year  to  year, 
it  would  also  be  necessary  to  revise  such  an  estimate  from  time  to  time. 

The  New  York  State  Conference  of  Charities  and  Correction 
undertook  an  investigation  of  the  cost  of  a  normal  standard  of  living 
in  New  York  City  in  1907.  This  investigation  was  in  great  detail, 
and  was  based  upon  318  budgets. 

For  the  report  224  family  budgets  were  selected  from  the  318  that 
were  available.  The  income  of  these  families  ranged  between  $600 
and  $900.  The  average  incomes  and  disbursements  of  the  three 
groups  are  shown  in  the  table. 

Average  Income  and  Expenditure* 


Items  of  Ezpenditurt 


Rent 

Carfare 

Fuel  and  light 

Furniture 

Insurance 

Food 

Meals  eaten  away  from  home . 

Clothing 

Health 

Taxes,  dues  and  contributions . 
Recreation  and  amusement.  . . 

Education 

Miscellaneous 


Totals. 


Group  I, 

Income, 

56oo-$6q9; 

Average,  $650 


$154 
II 

38 

6 

13 
279 
II 
83 
U 
8 

3 
S 

25 


$650 


Group  II, 

Income, 

$7oo-$7g(); 

Average,  $748 


$161 
10 

37 

8 

18 

3H 
22 

99 

14 

9 

6 

S 

32 


$735 


Group  III, 

Income, 

$8oo-$899; 

Average,  $846 


$168 

16 

41 

7 

18 

341 

18 

114 

22 

II 

7 

7 

41 


$811 


*  Reptort  of  Special  Committee  on  Standard  of  Living  in  New  York  City. 

Group  I.  Income  $6oo-$'/oo. — Do  the  families  with  incomes 
from  $600  to  S700  maintain  a  standard  of  living  stifficient  to  preserve 
physical  and  mental  efficiency  ?  The  average  family  of  five  persons 
in  this  group  pays  $13  a  month  for  rent,  for  which  they  are  able  to 
obtain  in  the  Borough  of  Manhattan  from  2  to  3  rooms.     The  rooms 


WANTS  AND  MEANS  OF  SATISFACTION  39 

are  apt  to  be  low  and  comparatively  small,  and  one  room  is  usually 
dark.  The  food  disbursement  for  such  a  family  is  approximately 
$270  a  year  for  five  individuals,  or  a  3 . 5  unit.  This  is  $82  a  year  per 
unit,  or  225  cents  per  man  a  day.  In  reckoning  the  consumption  of 
food,  the  proportionate  amounts  assigned  to  each  person,  as  compared 
with  the  requirements,  for  an  adult  man  are  expressed  by  i;  adult 
woman,  .8;  children,  .3  to  .7,  depending  upon  the  age.  The  family 
clothes  itself  at  a  cost  of  $84  a  year.  It  is  difficult  to  determine 
whether  a  family  of  five  can  buy  enough  clothing  for  their  needs  on 
$84  a  year.  Families  in  this  group  often  receive  gifts  of  clothing  from 
relatives,  employers,  and  friends. 

A  family  having  an  income  of  $650  a  year  spends  24  per  cent  of 
its  income  for  rent,  45  per  cent  for  food,  or  85  per  cent  for  four  items, 
rent,  food,  clothing,  fuel  and  light.  Only  2 . 5  per  cent  is  spent  for 
education,  recreation,  and  dues  to  societies;  the  other  12.5  per  cent 
is  for  health,  insurance,  furniture,  carfares,  meals  away  from  home, 
and  miscellaneous.  The  family  is  unable  to  make  any  provision 
against  accident,  or  to  lay  by  anything  for  a  rainy  day.  Twenty  of 
the  72  families  in  this  group  admitted  being  in  debt,  thus  showing 
how  difficult  it  is  to  live  within  this  income.  The  committee  con- 
cluded that  an  income  between  $600  and  $700  per  annum  was  insuffi- 
cient for  a  family  of  five  to  maintain  a  proper  standard  of  living  in  the 
Borough  of  Manhattan.  Leaving  aside  the  exceptions,  it  is  apparent 
that  many  families  in  this  group  have  a  fierce  struggle  for  existence. 
The  maximum  of  food  bought  approximates  the  minimum  set  up  by 
authorities  on  this  subject.  No  provision  can  be  made  for  accidents 
or  emergencies.  If  either  of  these  occur,  the  family  runs  into  debt. 
Were  it  not  for  the  charity  of  friends,  relatives,  employers,  or  philan- 
thropic organizations,  the  expenditures  of  the  family  would  be  larger 
than  the  income.  Such  a  family  literally  lives  a  hand-to-mouth 
existence,  with  neither  opportunity  nor  means  for  enjoyment  or 
recreation.  The  health  of  its  members  cannot  be  safeguarded  from 
its  own  resources.  The  housing  accommodations  barely  prevent 
overcrowding.    The  committee  states: 

It  requires  no  citation  of  elaborate  statistics  to  bring  convincing  proof 
that  $600  to  $700  is  wholly  inadequate  to  maintain  a  proper  standard  of 
living,  and  no  self-respecting  family  should  be  asked  or  expected  to  live  on 
such  an  income. 

Group  II.  Income  $yoo-$8oo. — The  average  expenditure  for  this 
group  was  S735 — $85  more  than  in  Group  I — to  be  accounted  for  as 
follows:  $45  more  for  food,  $16  more  for  clothing,  the  balance  of  $24 


40  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

fairly  evenly  distributed  among  the  other  items  of  the  budgets.  All 
of  the  79  families  in  this  group  lived  within  their  incomes.  The 
housing  conditions  remain  practically  the  same.  In  the  food  budget 
the  $45  additional  permits  of  more  animal  food  and  a  better  quality. 
The  per  capita  per  day  is  increased  to  25  cents.  All  in  all  there  is  a 
tendency  toward  improvement  in  condition,  and  were  it  not  that 
housing  conditions  have  not  improved,  it  might  be  assumed  that  the 
family  is  beginning  to  reach  a  point  where  a  fairly  decent  standard 
of  living  is  to  be  maintained.    The  committee  finds: 

The  committee  believes  that  with  an  income  of  between  $700  and  $800 
a  family  can  barely  support  itself,  provided  that  it  is  subject  to  no  extraor- 
dinary expenditures  by  reason  of  sickness,  death,  or  other  untoward  circum- 
stances. Such  a  family  can  live  without  charitable  assistance  through 
exceptional  management  and  in  the  absence  of  emergencies. 

Group  III.  Income  $8oo-$goo. — The  average  expenditure  for  the 
families  of  this  group  is  $811.  The  average  income  is  $846.  There 
is  thus  an  average  annual  saving  of  $35  per  family — in  marked  con- 
trast with  the  experiencGf^^of  the  groups  with  lower  incomes.  There 
is  an  increase  of  $76  in  expenditures  over  Group  II,  of  which  50  per 
cent  goes  for  food  and  clothing,  10  per  cent  for  rent,  15  per  cent  for 
miscellaneous,  and  25  per  cent  for  other  items.  The  housing  is  better. 
There  are  more  baths  and  particularly  more  toilets  in  the  apartments. 
The  rooms  are  larger,  with  more  light.  The  amount  that  is  now  dis- 
bursed for  food  (27  cents  a  day)  and  for  clothing  appears  to  be 
adequate.  The  people  have  opportunities  for  recreation  and  for 
amusement  that  are  fairly  normal.     The  committee  sums  up: 

In  view  of  all  these  facts,  the  committee  is  of  opinion  that  it  is  fairly 
conservative  in  its  estimate  that  $825  is  sufficient  for  the  average  family 
of  five  individuals,  comprising  the  father,  mother,  and  three  children  under 
fourteen  years  of  age,  to  maintain  a  fairly  proper  standard  of  living  in  the 
Borough  of  Manhattan. 

It  is  interesting  to  observe  that  Mrs.  More's  study,  based  upon 
200  families  in  New  York  City,  reaches  conclusions  as  to  the  minimum 
income  necessary  to  maintain  a  normal  standard  of  living  which  are 
very  similar  to  the  conclusions  of  the  State  Conference  of  Charities. 
She  says  (p.  269) : 

This  investigation  has  shown  that  a  well-nourished  family  of  five  in  a 
city  neighborhood  needed  at  least  $6  a  week  for  food.  The  average  for  39 
families  having  five  in  a  famUy  was  $327 .  24  a  year  for  food.  If  we  consider 
$6  a  week  (or  $3 1 2  a  year)  as  43 . 4  per  cent  of  the  total  expenditures  (which 


WANTS  AND  MEANS  OF  SATISFACTION 


41 


was  the  average  expended  for  food  in  these  200  families,  and  very  near  the 
average  for  the  workingmen's  families  in  the  extensive  investigation  of  the 
Department  of  Labor),  the  total  expenditures  would  be  about  $720  a  year. 
It  therefore  seems  a  conservative  conclusion  to  draw  from  this  study  that 
a  fair  living  wage  for  a  workingman's  family  of  average  size  in  New  York 
City  should  be  at  least  $728  a  year,  or  a  steady  income  of  $14  a  week. 
Making  allowance  for  a  larger  proportion  of  surplus  than  was  found  in  these 
families,  which  is  necessary  in  order  to  provide  adequately  for  the  future, 
the  income  should  be  somewhat  larger  than  this — that  is,  from  $800  to 
$900  a  year. 


10.    A  CLASSIFICATION  OF  THE  MEANS  OF  SATISFYING 

WANTS' 

Free  goods, 
not  the  objects 
ot  economic 
endeavor, 
hence  non- 
economic  goods 


Useful 
things 
or 
goods  < 


Land  and 

natural 

resources 


Scarce 
goods,  the 
objects  of 
economic 
endeavor, 
hence  eco- 
nomic goods 
or  wealth' 


Produced 
goods 


Consumed  by 
their  owners 


Consumers'  ■!  Loaned,  rented 
goods  or  hired  by 

their  owners 
for  an  income 


Private  or 
acquisitive 
capital 


Producers' 
goods 


Social  or 
"productive  capital 


Capital 


'  From  T.  N.  Carver,  Principles  of  Rural  Economics^  p.  203.  Ginn  &  Co., 
1911. 

'  Though,  in  an  absolute  sense,  well-being  depends  upon  free  goods  quite  as 
much  as  upon  scarce  goods,  yet  in  a  relative  and  practical  sense  it  does  not. 
Where  air,  water,  sunlight,  etc.,  are  abundant  and  free,  our  well-being  is  not 
improved  by  getting  more  of  these  things,  and  we  cannot  count  ourselves  as 
possessing  more  wealth  when  we  increase  our  possession  of  them.  But  when  they 
are  scarce,  our  economic  efforts  are  directed  toward  getting  more  of  them,  or  sub- 
stitutes for  them.  By  such  efforts  our  well-being  is  improved.  Such  things  are 
therefore  properly  called  wealth,  because  our  well-being  depends  upon  them  in  this 
relative,  immediate,  and  practical  sense.  Here,  as  frequently  happens  elsewhere, 
the  general  common  sense  of  mankind,  which  sanctions  this  use  of  the  word 
"wealth,"  shows  more  wisdom  than  the  hasty  judgment  of  the  partially  trained 
thinker  who  rejects  this  usage  and  insists  that  wealth  should  include  free  Koods 
as  well. 


42 


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WANTS  AND  MEANS  OF  SATISFACTION 


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44 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


cd 

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'Land 


12.   FORMS  OF  WEALTH' 

'Productive  land  \  ^"""P  '^"^'  grazing  land,  timber  land, 
Productive  land  |      j^j^^jj,^,  ,^j^j_  hunting  land,  fisheries 


Ways  of  transit 
Building  land 

Land  improvements 
Raw  materials 


Railways,  roadways, 
waterways,  parks 


Finished  products 


Slaves 


Human  Beings  |  ^^^^ 


/  r)  ..J.  /  Overhead 

(  Buildings  Underground 

j  Improvements  on  highways     c„rfo,.in„ 

(  ^'"°'-  ( Bridging^ 

!  Mineral 
Agricultural 
Manufactured 


iBy  being  burned 
By  being  eaten  or  drunk 
By  being  otherwise  used 

Mechanical  devices 

Animals 

I  "Hard  money" 
Durable  <  Clothing  and  jewelry 

'  Furniture  and  works  of  art 

Reading  matter 

Minor 


XI 

>>/ 
*^ 

u 

V 

a. 
o 


13.   FORMS  OF  PROPERTY  RIGHTS* 
Complete  (Fee  Simple) 


Partial 


To  services  cut  longitudinally 


To  services  cut  transversely 


Rights  to  definite  parts  of 
services 


Minor  and  indefinite 


'  Rights  in  common 

Rights  to  dififerent  usufructs 

Partnership  rights 
i  Joint  stock  shares 

(  Lease 

•j  Reversion 

(  Patent  and  copyright 


Promises 


Orders 


Bonds 

Private  notes 
Bank  notes 
Bank  deposits 


Checks,  drafts,  and 
bills  of  exchange 

Irredeemable  paper 
money 


(  Good  will  and  custom 
(  Taxing  power 


'  From  Irving  Fisher,  The  Nature  of  Capital  and  Income,  p.  7.     The  Macniillan 
Company,  1906. 

•  Fisher,  op.  cit.,  p.  37, 


WANTS  AND  MEANS  OF  SATISFACTION  45 

14.  ESTIMATE  OF  WEALTH  OF  THE  UNITED  STATES,  1904' 

Total $107,104,192,410 

Real  property  and  improvements $62,341,472,627 

Live  stock 4,o73;79i.736 

Farm  implements  and  machinery 844,989,863 

Manufacturing  machinery,  tools,  and  implements 3,297,754,180 

Gold  and  silver  coin  and  bullion i  ,998,603,303 

Railroads  and  their  equipment 11,244,752,000 

Street  railways 2,219,966,000 

Telegraph  systems 227,400,000 

Telephone  systems 585,840,000 

Pullman  and  private  cars 1 23,000,000 

Shipping  and  canals 846,489,804 

Privately  owned  water  works 275,000,000 

Privately  owned  electric  light  and  power  stations 562,851,105 

\11  other 

Agricultural  products 1,899,379,652 

Manufactured  products 7,409,291,668 

Imported  merchandise ' 495,543,685 

Mining  products 408,066,787 

Clothing  and  personal  adornment 2,500,000,000 

Furniture,  carriages,  and  kindred  property 5,750,000,000 

15.  THE  PRODUCTION  OF  ECONOMIC  GOODS* 

§  I.  Most  men  are  related  to  the  business  world  in  two  ways: 
.  as  workers  they  are  attached  to  some  particular  business  engaged  in 
producing  some  specialsort  of  goods  or  services;  as  consumers  they 
are  attached  to  general  industry  by  a  great  number  of  suckers.  In 
seeking  to  understand  the  industrial  system  a  man  is  thus  furnished 
with  two  approaches:  his  narrov/  concentrated  interest  as  producer, 
his  broad  diffused  interest  as  consumer.  He  learns  at  both  ends 
but  his  curiosity  is  more  strongly  and  more  constantly  directed  by 
what  goes  on  in  the  little  corner  of  the  industrial  world  in  which  he 
earns  his  living,  the  business  in  which  he  is  employed. 

Turning  his  mind  from  the  particular  process  on  which  he  is 
mainly  occupied,  as  a  machine  tender,  a  clerk,  a  laborer,  a  shop 

»  From  the  Special  Report  of  the  United  States  Census  Office,  Wealth,  Debt, 
ind  Taxation  (1907),  p.  27. 

» From  J.  A.  Hobson,  The  Industrial  System,  pp.  i-io.  Longmans,  Green  & 
Co.,  1909. 


46  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

assistant,  to  what  is  taking  place  around  him,  he  soon  comes  to  get  a 
grip  of  the  main  features  of  the  structure  of  the  business  to  which  he 
"belongs." 

Here  is  an  employee  in  a  shoe  factory:  he  sees  around  him  a 
number  of  other  wage-earners,  most  tending  some  machine,  others 
clerks  in  the  office;  there  is  the  factory  itself  and  the  premises  it 
occupies,  the  machinery  and  fittings,  the  stock  of  leather  and  shoes 
in  various  stages  of  production;  lastly  comes  the  management, 
summarized  in  the  employer  or  "boss." 

Such  are  the  main  ingredients  of  the  business  as  he  sees  it  encased 
in  the  four  walls  of  the  factory  yard:  in  outline  he  comes  to  know  how 
these  ingredients  are  related,  and  he  grasps  the  business  as  an  organi- 
zation under  the  direction  of  the  manager. 

If  he  tried  to  visualize  the  business  in  this  broad  outline  it  would 
take  some  such  shape  as  this: 


As  soon  as  he  came  to  realize  the  business  as  a  whole,  he  would 
recognize  that  in  the  counting-house  or  the  bank  there  was  somt 
money  that  belonged  to  the  business. 

A  shop  assistant  or  a  mercantile  clerk,  who  was  not  engaged  in 
making  goods  but  in  collecting  them,  arranging  and  selling  them, 
would  find  the  general  structure  of  his  business  similar,  though  the 
sort  of  work  done  and  the  instruments  were  different:  plant  would 
play  a  smaller  part,  there  being  very  little  machinery  or  tools;  ma- 
terials and  stock  would  only  be  a  different  arrangement  of  the  same 
goods,  and  would  occupy  a  much  more  prominent  place;  as  buying 
and  selling  seemed  the  soul  of  such  businesses,  money  would  bulk 
larger  in  his  conception  of  the  business. 


WANTS  AND  MEANS  OF  SATISFACTION  47 


A  farm  laborer  would  see  his  business  as  a  different  sort  of  compo- 
sition: land,  which  formed  a  small  element  in  the  factory  premises, 
and  did  not  bulk  very  large  even  in  the  city  warehouse  or  shop, 
would  occupy  a  very  prominent  place  in  the  farm;  machinery  might 
be  a  small  factor,  and  the  number  of  employees  very  few. 

The  bricklayer  working  for  a  firm  of  builders  would,  again,  form 
a  different  idea  of  his  business,  which,  except  as  regards  a  small 
yard  and  office,  was  not  really  contained  in  fixed  premises,  but 
consisted  rather  in  a  number  of  fluctuating  contracts  which  affected 
him  as  "jobs."  But  though  the  material  outlines  of  his  business 
would  be  less  fixed  and  less  clearly  defined,  he  would  come  to  recog- 
nize that  his  employer  was  in  control  of  a  number  of  workers,  business 
premises,  a  stock  of  building  materials,  and  some  machinery,  as  well 
as  money  to  buy  materials  and  pay  wages. 

To  a  keen  observant  worker  the  structure  of  the  business  in  which 
he  works  would  thus  take  shape,  some  of  the  necessary  parts  being 
clearer  and  better  realized  than  others.  The  young  business  man, 
who  enters  the  factory  or  the  shop  as  a  clerk,  will  see  things  from  a 
somewhat  different  viewpoint  from  that  of  the  manual  worker;  the 
employer's  son,  adopting  from  the  first  a  managerial  attitude,  will 
more  quickly  get  a  more  accurate  outline  of  the  working  of  the 
business  as  a  whole.  The  worker,  to  whom  the  commercial  or 
financial  part  of  the  factory  or  mine  or  warehouse  is  unexplored, 
often  wrongly  identifies  his  work-place  as  a  complete  business,  whereas 
it  is  often  only  one  branch  or  department  of  a  larger  business  unit 
broken  into  a  number  of  locally  severed  parts,  each  of  which  may  seem 
to  him  an  independent  economic  thing. 

The  intelligent  observer,  studying  his  own  business  from  inside 
and  others  from  outside,  will  soon  see  that  the  true  size  and  limits 


48  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  a  single  separate  business  can  best  be  determined  by  watching  the 
element  of  management.  Is  tliere  practically  independent  manage- 
ment, and  if  so,  what  is  the  area  of  its  control  ?  is  the  important  ques- 
tion to  him.  If  the  manager  of  a  factory  or  shop  receives  his  orders 
from  outside,  or  in  other  important  ways  is  instructed  in  the  uses  to 
which  he  puts  his  employees,  his  machinery,  etc.,  and  in  the  buying 
and  selling  essential  to  his  business  life,  it  becomes  evident  that  such 
a  factory  or  shop  is  not  a  complete  business,  but  only  part  of  some 
larger  business. 

When  we  examine  the  grouping  of  businesses  in  trades  and 
markets,  we  shall  see  many  ways  in  which  the  liberty  of  manage- 
ment in  businesses  that  seem  to  the  ordinary  employee  free  is  cur- 
tailed; not  only  in  retail  trade,  but  in  manufacturing,  mining,  and 
other  industrial  processes,  many  businesses  which  look  to  the  unin- 
formed outsider  free  are  tied  by  investments,  contracts,  mortgages, 
or  other  bonds  of  business  Ufe. 

Here,  as  elsewhere,  liberty  is  a  matter  of  degree.  But  at  present 
it  must  suffice  to  say  that  substantial  independence  of  management 
constitutes  a  separate  business;  where  the  employer  or  manager 
has  substantial  liberty  in  buying  and  selling  and  arranging  his  factory 
or  shop  or  warehouse  as  he  thinks  best,  we  call  his  a  separate  business. 

We  must,  however,  if  we  are  to  carry  out  our  intention  of  including 
in  our  inquiry  all  processes  of  earning  incomes  or  livelihoods,  extend 
the  use  of  the  term  "business"  from  the  processes  engaged  in  making 
and  distributing  material  goods  to  those  which  make  or  distribute 
non-material  goods  that  are  bought  and  sold.  So  a  lawyer's  firm,  a 
doctor's  practice,  an  artist's  studio,  a  "cure  of  souls,"  a  writer's 
hterary  connection,  or  any  other  production  and  sale  of  skill  or 
services  which  are  under  the  control  of  a  person  or  set  of  persons  and 
form  the  basis  of  a  livelihood,  must  be  counted  as  a  business. 

The  whole  of  the  business  world  must  be  conceived  as  producing 
quantities  of  material  or  immaterial  articles,  the  sale  of  which  fur- 
nishes the  livelihood  of  the  community,  and  the  active  units  in  these 
processes — extractive,  manufacturing,  transport,  trading,  financial, 
professional,  artistic,  recreative,  domestic,  etc. — are  businesses. 

§  2.  Such  businesses  evidently  differ  from  one  another  very 
widely,  (a)  in  size,  (b)  in  the  relative  importance  of  their  constituent 
parts,  and  (c)  in  the  ownership  and  control  of  the  business. 

a)  As  regards  size,  an  investigation  of  the  industrial  world 
shows  immense  variety  even  within  the  same  sorts  of  trade.     In 


WANTS  AND  MEANS  OF  SATISFACTION  49 

more  primitive  or  backward  countries  very  few  large  businesses 
exist  in  which  a  number  of  workers  are  brought  together  to  work 
under  a  single  management  with  large  quantities  of  tools  and  materials. 
In  such  a  country  as  China,  or  even  Russia,  the  vast  majority  of 
businesses  are  confined  to  small  workshops  or  home  industry,  where 
the  manager  works  alone  or  with  a  few  others,  with  simple  tools  and 
small  stock  of  materials.  Even  in  the  most  advanced  industrial 
countries  a  large  proportion  of  the  businesses  remain  in  this  small 
size;  the  most  highly  developed  industries  in  England  or  the  United 
States  still  retain  large  quantities  of  home  workers  or  other  little 
business  units. 

In  most  departments  of  industry,  even  when  great  capitalist 
enterprise  is  prominent,  great  quantities  of  little  simple  businesses 
survive.  The  small  peasant,  working  his  plot  of  land  with  the 
labor  of  his  own  family,  and  living  on  the  produce,  still  continues 
to  exist  in  large  numbers  in  most  highly  advanced  nations:  most  of 
the  world's  food  supply  is  still  produced  by  these  little  independent 
farmers.  Though  large  and  expensively  equipped  factories  have 
absorbed  certain  important  branches  of  manufacture,  and  are  con- 
stantly extending  the  reign  of  machinery  over  new  fields  of  production, 
a  very  large  proportion  of  the  manufacturing  arts  still  remains  in 
small  businesses,  even  in  those  textile  and  metal  trades  where  large 
capitalism  has  established  itself  most  strongly.  Railroads,  steam- 
ships, and  carrying  companies  have  not  taken  over  all  the  transport 
industry;  the  small  boatman,  car-driver,  and  carrier  still  keep  a  hold 
on  important  branches  of  retail  local  traffic.  In  the  building  trades 
the  big  contractor  leaves  a  lot  of  smaller  or  subsidiary  work  for  little 
builders.  Departmental  stores  and  branch  companies  hold  a  large 
share  of  retail  distribution,  but  they  do  not  prevent  immense  quanti- 
ties of  small  shopkeepers  from  earning  a  precarious  but  independent 
livelihood.  Even  in  mining  and  finance,  two  departments  of  activity 
where  capitalism  is  supreme,  there  still  remains  an  area  for  the 
"placer"  and  the  small  jobber  or  money  dealer.  Regarding  the 
professions  from  the  standpoint  of  business  structures,  we  perceive  the 
individual  or  the  small  firm  still  in  possession  of  the  field,  except  in  a 
few  branches  of  the  recreative,  educational,  and  pubUshing  arts. 

Whenever  we  look  in  any  part  of  the  industrial  system  we  see 
businesses  set  out  in  different  sizes,  ranging  from  the  single  worker, 
who  molds  some  material  into  a  useful  shape  by  the  strength  of  his 
own  body  and  the  use  of  some  simple  tool,  to  the  huge  impersonal 


5©  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

joint-stock  company  employing  millions  of  capital  and  thousands 
of  employees  in  various  parts  of  the  habitable  globe,  and  between 
these  two  extremes  a  vast  variety  of  intermediate  sizes. 

b)  Certain  characters  in  the  structure  of  a  business  correspond 
to  differences  of  size.  A  small  business  is  usually  much  simpler  in 
structure;  if  it  is  engaged  in  handling  materials  to  shape  them  into 
commodities,  the  element  of  labor  usually  bulks  more  largely  than  the 
others.  Done  usually  in  the  home  or  workshops  attached  to  the 
home,  it  has  no  need  of  specialized  buildings;  tools  or  machinery, 
though  essential,  do  not  represent  a  large  expenditure;  the  power 
used  in  shaping  or  moving  the  materials  is  mostly  got  from  the  bodies 
of  the  workers,  and  not  from  coal  or  other  non-human  source.  As  a 
rule,  such  little  businesses  can  be  conducted  with  a  very  little  store  of 
cash. 

As  we  ascend  toward  businesses  of  larger  size,  the  relative  impor- 
tance of  these  factors  shifts.  Separate  expensive  buildings  are 
usually  required;  the  quantity  of  machinery  and  other  plant  grows 
so  large  that  in  many  a  modern  mill,  mine,  railroad,  or  steamship 
several  thousand  pounds'  worth  of  plant  co-operates  with  each  worker; 
fuel  and  the  supply  of  power  become  enormously  important  items; 
the  financial  side  of  the  business  involves  cash  or  credit,  the  use  of 
money,  as  a  large  factor;  while  management,  which  in  the  small 
simple  business  was  a  merely  incidental  function  of  the  independent 
worker,  becomes  a  speciaUzed  separate  department  of  supreme 
significance. 

c)  The  most  vital  of  all  differences  between  the  small  primitive 
business  unit  and  the  large  capitalist  unit  has  reference  to  the  owner- 
ship and  control  of  the  various  factors  composing  the  business. 

The  factors  in  a  business,  as  we  have  seen,  are  land,  buildings, 
machinery  and  tools,  power,  raw  materials  and  stock,  money,  labor, 
and  management.  Every  business  which  handles  material  goods 
requires  some  of  each  of  these  factors,  though  in  widely  different 
proportions.  In  the  smallest  simplest  business  form,  where  a  work- 
man works  alone  on  his  own  account  in  his  owti  house  or  work-place 
he  commonly  is  himself  the  owner  of  all  these  factors.  Such  is  the 
smallest  peasant  freeholder  in  many  countries,  working  his  own 
land  with  his  own  tools  and  cattle,  sowing  his  own  seed,  and  owning 
his  house  and  sheds  and  the  farm  produce.  The  village  smith  or  other 
small  artisan,  certain  cabinet  makers,  and  other  little  manufacturers 
in  London,  still  represent  this  early  type.     Large  niunbers  of  little 


WANTS  AND  MEANS  OF  SATISFACTION  51 

makers,  e.g.,  tailors,  cobblers,  owning  all  the  factors  except  the  raw 
material,  which  they  receive  from  their  customers  or  from  some 
merchant  to  whom  they  sell  their  product,  everywhere  survive.  Here 
we  may  say  that  the  worker  is  the  owner  of  all,  or  nearly  all,  the  factors 
including  management.  As  we  grade  the  various  forms  of  business 
up  from  this  to  the  most  developed  form  of  modem  "capitalist" 
enterprise,  we  see  one  after  another  of  the  factors  removed  from  the 
ownership  and  control  of  the  worker  and  transferred  to  "management." 
In  the  complete  capitalist  business,  land,  machinery,  and  tools, 
power,  raw  materials  and  stock,  money,  labor-power  are  owned  and 
controlled  by  the  management,  the  single  check  upon  absolute  owner- 
ship being  that  the  management  does  not  own  the  laborers  them- 
selves (as  it  owns  the  coal  that  fiu-nishes  machine  power)  but  only 
the  portions  of  labor-power  as  they  are  released  from  the  persons  of 
the  workers.  In  certain  great  businesses  some  other  factor,  as,  for 
instance,  electric  power  or  the  land  on  which  business  premises  stand, 
may  be  similarly  hired,  not  owned.  But,  speaking  generally,  the 
management  in  the  highly  developed  capitalist  business  owns  and 
controls  all  the  other  factors. 

Between  these  two  types  a  great  number  of  intermediate  types 
of  businesses  will  be  found.  An  immense  variety  of  small  farms, 
workshops,  shops,  and  other  commercial  or  professional  businesses 
exist  where  the  manager  begins  to  separate  from  the  workers,  still 
working  himself,  but  hiring  other  workers  who  have  no  part  in 
management,  though  they  may  still  own  the  tools  with  which  they 
work,  and  even,  as  in  many  farms,  fishing  or  mining  businesses,  some 
share  of  the  stock  and  product. 

In  some  sorts  of  business  the  manager  or  employer  owns  materials, 
which  he  gives  out  to  workers  to  do  in  their  own  homes,  or  in  work- 
shops which  they  provide,  either  letting  out  to  them  machines  or 
tools,  or  leaving  the  provision  of  machinery,  sometimes  also  of  power, 
to  the  workers.  In  agriculture  and  in  the  textile  and  metal  manu- 
factures of  England  today  one  finds  every  stage  of  the  business  form 
represented,  from  the  simplest  type  of  the  self-sufficient  single  worker 
to  that  of  the  joint-stock  company  owning  and  controlling  every 
factor  in  production. 

In  agriculture  the  small  freeholder  or  yeoman,  the  tenant  farmer, 
the  market  gardener,  the  allotment  worker  represent  widely  diver- 
gent types  of  ownership  of  land,  fencing,  tools,  crops,  etc.;  fishing 
and  mining  are  full  of  anomalies  in  ownership  of  tools,  product,  and 


52  MATERL\LS  FOR  ELEMENTARY  ECONOiMICS 

management;  the  textile  and  clothing  trades  show  every  variety  of 
business  form,  from  the  home  workshop  where  the  worker  finds 
machinery',  and,  in  part,  raw  materials,  to  the  completely  centralized 
factory;  the  metal  trades  exhibit  in  the  higher  form  great  engineering 
or  steel-making  firms  owning  ever>-thing  they  use,  even  coal  and  iron 
mines,  trucks,  and  ships,  but  furnish  a  basis  of  survival  not  only  for 
small  Birmingham  workshops  working  with  hand-power  on  materials 
sometimes  o^Mied,  sometimes  provided  for  outside,  but  for  SheflSeld 
grinders  receiving  rough  blades  to  be  finished  in  their  own  workshops 
with  hand-power,  and  small  watchmakers  in  London  or  Coventry 
keeping  up  the  earliest  type  of  self-sufficing  home  workshop. 

Or  turning  to  retail  trade,  we  find  every  variety  still  surviving 
in  a  large  city;  though  perhaps  few  shopkeepers  are  owners  of  the 
land  and  shop  premises,  as  regards  stock,  fittings,  management,  and 
labor,  we  see  a  gradation  from  the  small  independent  shopkeeper, 
owning  his  own  stock  and  employing  only  his  own  family,  to  the  great 
store  which  resembles  the  most  highly  evolved  capitalist  manufac- 
tures in  every  other  feature  except  the  part  played  by  machinery  and 
non-human  power. 

When  from  the  numerous  types  of  business  unit  represented  in 
these  agricultural,  manufacturing,  and  commercial  occupations  one 
turns  to  finance,  including  great  banking  and  insurance  firms  and 
small  money-lending  businesses,  or  to  the  professions,  the  fine  arts, 
the  recreative  arts,  and  the  countless  businesses  engaged  in  supplying 
"personal"  services,  from  the  Turkish  bath  and  barber's  saloon 
down  to  the  individual  domestic  service  of  a  household — when  one 
takes  stock  of  all  these  sizes  and  sorts  of  industry,  the  shapes  of 
the  business  seem  to  defy  classification.  But  omitting  the  delicate 
question  whether  certain  occupations  are  entitled  to  be  called  separate 
businesses,  and  confining  our  attention  to  those  which  are  commonly 
admitted  so  to  rank,  we  find  that  while  differing  immensely  in  size, 
relative  proportion  of  importance  for  several  factors,  and  nature  of 
ownership  and  control,  they  preserve  certain  common  features. 

In  all  businesses  concerned  with  extracting,  shaping,  or  moving 
matter  we  find  the  matter  itself  to  which  the  work  is  applied,  the 
machines  or  tools  by  which  the  matter  is  manipulated,  the  mone} 
required  for  buying  what  is  needed,  the  buildings  or  premises  whert 
the  material  is  stored,  or  the  tools  kept,  or  the  work  carried  on, 
with  the  necessary  fittings  or  fixtures,  the  land  from  which  the  matter 
is  extracted  or  upon  the  surface  of  which  work  is  done,  the  workers 


WANTS  AND   MEANS  OF  SATISFACTION  53 

who  do  the  work,  and  the  employers  or  management.  Even  in 
businesses  concerned  with  producing  not  material  goods,  but  non- 
material  services,  such  as  professional  advice,  music,  and  other 
recreative  services,  etc.,  all  these  requisites,  except  in  some  cases 
raw  materials,  are  needed,  for  the  non-material  services  are  produced 
under  material  conditions  of  space  and  shelter  by  workers  who  actually 
require  tools  or  instruments  and  skilled  direction  or  organization. 

In  developing  our  picture  of  industry,  we  may,  however,  legiti- 
mately confine  our  attention  chiefly  to  those  industries  engaged  in 
producing  material  commodities,  with  merely  occasional  references 
to  the  arts  concerned  with  non-material  services. 

§  3.  For  certain  useful  purposes  of  understanding  how  the  mechan- 
ism of  industry  works,  it  will  be  convenient  sometimes  to  gather 
together  under  a  single  class  several  of  the  factors  or  requisites  of 
business  which  have  here  been  separately  described.  So  all  the  non- 
human  factors  in  a  business,  except  the  land,  may  be  grouped  under 
the  head  of  "capital,"  comprising  buildings,  machines  and  tools, 
fittings,  fuel  or  power,  materials,  stock,  money.  Some  would  include 
land  under  capital,  but,  for  reasons  which  will  be  given  later,  we  shall 
find  it  best  to  distinguish  the  services  directly  rendered  to  production 
by  earth,  natural  forces,  and  space,  from  those  rendered  by  the  other 
factors.  Thus  distinguishing  land  from  capital,  we  may  also  dis- 
tinguish the  materials  which  it  is  the  object  of  the  business  to  extract, 
shape,  or  move,  from  those  material  factors  which  are  instruments 
for  these  productive  processes,  and  which  are  used  up  with  more  or 
less  rapidity  as  they  do  this  work.  The  first,  which  is  a  continual 
stream  of  matter  flowing  through  the  business  and  passing  out  of  it 
to  customers,  may  be  called  "circulating"  capital;  the  factories  and 
other  buildings  where  the  work  is  done,  machines,  tools,  railways, 
ships,  carts,  etc.,  may  be  called  "fixed"  capital,  standing  as  it  does 
at  some  fixed  point  in  the  industrial  stream  to  forward  the  passage 
of  the  raw  material  or  unfinished  goods  toward  their  final  destiny  as 
commodities.  Of  course  every  other  sort  of  capital  is  used  up  in  its 
work  of  helping  to  shape  or  move  raw  materials  into  their  final  form 
or  place,  and  this  "wear  and  tear"  may  be  considered  as  passing  into 
the  goods  that  are  produced,  and  so  as  "circulating"  in  the  industrial 
world.  But  it  is  altogether  more  convenient  to  mark  out  the 
material  whose  manipulation  is  the  direct  and  express  object  of  a 
business,  from  the  materials  which  are  only  means  toward  this 
process. 


54  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Certain  sorts  of  capital  it  has  been  found  difficult  to  classify. 
Fuel,  if  regarded  as  merely  instrumental  to  the  operation  of  a  machine, 
may  be  treated  as  "fixed";  but  it  is  more  conveniently  regarded  as  a 
form  of  raw  material  worked  into  the  main  current  in  the  form  of 
power,  and  so  classed  as  "circulating." 

Having  thus  designated  the  non-human  factors  of  the  business 
^  under  land  (or  Nature)  and  capital  (fixed  or  circulating),  we  come 
to  the  human  factors  spoken  of  as  labor-power  and  management. 
As  in  the  other  cases,  no  absolutely  rigid  distinction  can  be  made. 
We  cannot  confine  labor-power  to  the  manual  or  physical  work  in 
a  business,  reserving  management  for  the  mental  guidance  and 
organization.  For  all  manual  labor,  regarded  as  production,  con- 
tains mental  and  moral  energy,  nor  is  management  devoid  of  all 
output  of  physical  exertion.  From  the  standpoint  of  physical  and 
mental  it  would  be  possible  to  find  a  nice  gradation  in  a  complex 
modem  business  from  the  purely  routine  hand  worker  up  to  the  general 
manager  in  his  office,  but  nowhere  could  one  find  the  point  where 
mental  exertion  began  or  physical  left  off.  Nor  can  we  definitely 
divide  them  as  employer  and  employees,  though  for  some  piu^oses 
this  division  will  work  well.  For  in  most  great  modem  businesses  the 
manager  is  nominally,  often  really,  an  employee  of  the  directors  or 
the  shareholders,  and,  so  far  as  the  practical  arts  of  management  are 
concerned,  they  are  not  confined  to  the  manager,  but  largely  dele- 
gated to  sub-managers,  overseers,  inspectors,  and  other  "officials." 

Many,  bearing  these  difficulties  in  mind,  wish  to  lump  all  the 
hujnan  exertion,  physical  and  mental,  under  the  general  name  "  labor." 
But  there  are  practical  reasons  for  rejecting  this  solution.  The  part 
played  by  the  man  or  men  who  direct  the  course  of  a  business,  the 
interest  they  have  in  the  business  and  the  gain  they  receive  from  the 
business,  are  in  most  instances  so  different  from  the  part  played  by 
the  men  who  merely  receive  and  follow  orders,  and  their  interest  and 
gain,  that  it  is  desirable  to  treat  the  two  as  different  factors  of  a  busi- 
ness. 

In  most  businesses  "direction"*  and  "management"  are  not 
sufficiently  distinct  to  warrant  any  further  distinction.  In  our 
preliminary  analyses  of  the  business  unit  we  shall  therefore  treat 

'  In  many  "companies"  the  personnel  and  the  interests,  as  well  as  the  work  of 
director  and  manager,  are  of  course  separated. 


WANTS  AND  MEANS  OF  SATISFACTION  $5 

them  as  one,  and  regard  both  direction  and  management  of  the 
business  as  comprised  for  the  most  part  in  the  manager  or  employer. 


Adopting,  then,  the  commonly  accepted  distinctions,  we  may  bring 
our  more  numerous  factors  of  a  business  under  the  four  conventional 
heads,  land,  capital,  labor,  and  management,  thus  simplifying  our 
portrait  of  the  business  as  the  unit  of  industry. 

i6.  A  CLASSIFICATION  OF  INDUSTRIES' 

The  object  of  the  analysis  of  industry  given  in  this  chapter  has 
been  to  impress  upon  the  reader  the  general  outlines  of  the  structure, 
taking  for  this  purpose  a  rude  classification  of  industrial  processes. 
It  may  be  well,  following  in  the  main  the  classification  of  Jevons,* 
to  append  the  fuller  analysis  of  industry  which  a  scientific  census  of 
occupations  would  yield: 

Proprietors  of  land  and  natural  sources  of  supply:  Landowners,  Quarry 
Owners,  Mine  Proprietors,  Owners  of  Fishing  Rights  (functions  generally 
of  a  passive  kind). 

Producers  of  raw  materials:  Agriculturists,  Gardeners,  Woodmen, 
Shepherds,  Herdsmen,  Hunters,  etc.     Miners,  Colliers,  Fishermen. 

Dealers  in  raw  materials  {middlemen  between  producers  and  manufac- 
turers): e.g..  Corn  Merchants,  Corn  Agents,  Corn  Factors,  Corn  Chandlers, 
Cotton  Importers,  Cotton  Merchants,  Cotton  Brokers,  Cotton  Agents, 
Cotton  Salesmen. 

Manufacturers  (first  order) :  e.g..  Corn  Miller,  Cotton  Spinner,  Timber 
Sawyer,  Iron  Smelter. 

'  From  J.  A.  Hobson,  The  Indmtrial  System,  pp.  34-37.  Longmans,  Green  & 
Co.,  1909. 

[For  a  discussion  of  the  classification  of  industries  with  special  reference  to 
occupations,  see  "The  Classification  of  Occupations,"  Selection  53. — EditobsI. 

'  Principles  of  Economics,  pp.  108  fiE. 


56  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Dealers  (between  two  or  more  manufacturing  processes):  e.g.,  Flour 
Merchant  (between  Miller  and  Baker),  Yarn  Merchant  (between  Cotton 
Spinner  and  Manufacturer),  Timber  Merchant  (between  Sawyer  and 
Carpei-ter,  etc.). 

Manufacturers  (second  order):  Baker,  Confectioner,  Cotton  Weaver, 
Dyer,  Printer,  Shirtmaker,  etc.  Cabinet  Maker,  Carpenter,  etc.  Rolling 
Mills,  Engine  Works,  Cutlery,  etc.  (between  any  two  processes  a  class  or 
more  of  dealers  may  intervene). 

Wholesale  dealers  in  commodUies:  Warehousemen,  Produce  Merchants, 
Exporters,  etc.  (wholesale  dealers  in  manufactured  goods  are  often  "general 
stores."  In  Foreign  Trade,  however,  they  specialize  often  (o)  according 
to  sea  routes;  {h)  according  to  classes  of  manufacture,  e.g.,  cotton  goods, 
iron  trade,  etc.). 

Retail  dealers:  Shopkeepers,  Hawkers,  Costermongers,  Licensed 
Victuallers,  etc.  (often  comprising  a  final  act  of  manufacture,  e.g.,  butcher, 
confectioner,  dressmaker,  etc.). 

Transport  (distributive  industry  according  to  Jevons):  Carriers  on 
Railways,  Canals,  Ships,  Docks,  Roads,  Carriages,  Horses  (carrying  raw 
materials  from  farm,  mine,  etc.,  to  manufacture;  carrying  half -made  goods 
between  different  orders  of  manufacture;  carrying  commodities  between 
factories,  wholesale  dealers,  retailers,  and  consumers). 

Subsidiary  trades  ("Any  which  merely  assist  other  trades  by  supplying 
the  minor  requisites"):  e.g.,  Subsidiaries  to  Landowner:  Estate  Agent, 
Steward,  Solicitors,  Surveyors,  etc.  Subsidiaries  to  Farmers:  Agricultural 
Implement  Makers,  Seed  Merchants,  Manure  Merchants,  etc.  Subsidiaries 
to  Corn  Merchant:  Granary  Maker,  Sack  Maker,  Corn-measure  Maker, 
etc.  Subsidiaries  to  Miller:  Millwright,  Machinist,  Millstone  Cutter,  etc. 
Subsidiaries  to  Baker:  Oven  Builder,  Peel  Maker,  Fuel  Merchant,  etc. 

Finance:  Banking,  Insurance,  etc. 

This  classification  is  based  upon  consideration  of  industrial 
processes,  and  marks  the  standpoint  of  the  producer. 

The  consumer's  standpoint  would  yield  a  transverse  classification 
on  the  basis  of  the  sorts  of  utility  or  satisfaction  afforded  by  the 
commodities. 

Taking  the  chief  orders  of  utility,  we  should  classify  along  the 
following  lines: 

Food:  Bread  StufTs,  Dairy  Produce,  Meat,  Groceries,  Beer,  Wine,  etc 
(or  according  to  materials,  wheat,  sugar,  milk,  etc.). 

Clothing:  Over  Wear  (Suits,  Dresses,  etc.).  Under  Wear,  Hats,  Boots, 
Gloves,  etc.  (or  according  to  material,  Cotton,  Wool,  Flax,  Silk,  Leather. 
India-rubber,  etc.). 


WANTS  AND  MEANS  OF  SATISFACTION  57 

Lodging:  Dwelling-houses,  Furniture,  Crockery,  etc.  (according  to 
materials — Wood,  Stone,  Steel,  Brick,  etc.). 

Refinements:  Ornaments,  Amusements,  Literature,  etc. 

Jevons,  in  suggesting  the  classification  of  occupations  according 
to  "commodity,"  based  upon  the  four  great  classes,  food,  clothing, 
lodging,  refinements,  does  not,  however,  as  might  have  been  expected, 
cleave  to  the  consumer's  standpoint  (which  I  have  here  preferred), 
but  divides  his  classes  according  to  kinds  of  material  used,  not  accord- 
ing to  the  "wants"  satisfied. 

A  really  scientific  classification  from  the  consumer's  standpoint 
would  be  based  upon  a  psycho-physical  analysis  of  wants,  beginning 
with  food,  shelter,  clothing  in  their  elementary  uses  as  life-preservers, 
and  proceeding  to  the  higher  and  more  specialized  wants  (conveni- 
ences, luxuries,  etc.),  as  they  arise  in  natural  order  from  the  satis- 
faction of  the  primary  physical  wants. 

Industries  and  occupations  would  then  be  classified  in  relation 
to  these  needs  or  wants.  The  term  refinements  cannot  even  be 
regarded  as  containing  the  germ-idea  of  such  a  classification. 


in.  NATURAL  RESOURCES  AS  ECONOMIC 

FACTORS 

17.  THE  FUNCTION  OF  NATURAL  AGENTS* 

In  this  inquiry  the  earth  as  modifying  human  life  includes  the 
land  surface  down  to  the  bottom  of  the  deepest  possible  mine  or 
artesian  well  or  geological  stratum;  all  the  aqueous  mass — that 
is,  every  drop  of  water  in  the  seas  and  out  of  them,  for  there  is  no 
telling  when  any  drop  may  enter  the  circle  of  himian  agencies  and 
ownerships;  the  circumambient  air,  every  gallon  of  that  aerial 
ocean  which  swathes  the  world  and  vitalizes  all  living  things,  the 
common  carrier  of  clouds  and  birds,  of  health  and  disease,  of  music 
and  perfumes,  of  industry  and  commerce.  As  modifying  human 
conduct,  as  subject  of  pre-emption  and  monopoly,  not  only  the  masses 
just  mentioned  are  included,  but  motions  and  powers,  even  gravity, 
mechanical  properties,  physical  forces,  chemical  activities,  vital 
phenomena  of  plants  and  animals,  that  may  be  covered  by  patents 
and  their  uses  become  a  matter  of  legislation  and  diplomacy. 

The  earth  is  the  mother  of  all  mankind.  Out  of  her  came 
they.  Her  traits,  attributes,  characteristics  they  have  so  thor- 
oughly inherited  and  imbibed  that,  from  any  doctrinal  point  of 
view  regarding  the  origin  of  the  species,  the  earth  may  be  said  to 
have  been  created  for  men  and  men  to  have  been  created  out  of  the 
earth.  By  her  nurture  and  tuition  they  grow  up  and  flourish,  and 
folded  in  her  bosom  they  sleep  the  sleep  of  death. 

The  human  race  is  put  into  relation  with  all  bodies  through 
gravitation,  with  all  mineral,  vegetable,  and  animal  substances 
through  the  laws  of  physics  and  chemistry;  with  the  vegetal  and 
the  animal  kingdom  through  the  additional  phenomena  called  life, 
and  with  all  animals  through  mentation. 

The  earth  is  also  a  great  warehouse  of  materials  of  infinite 
qualifications  for  gratifying  himian  desires. 

This  is  apparent  enough  to  anyone  who  reflects  about  it,  but 
few  persons  think  of  the  long  ages  during  which  these  substances 

•Adapted  from  Otis  T.  Mason,  " Technogeography,  or  the  Relation  of  the 
Earth  to  the  Industries  of  Mankind,"  in  the  American  Anthropologist,  VII  (1894), 
138-58. 

S8 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  59 

were  being  compounded  and  compacted.  These  materials  are 
the  foundation  of  all  technique  and  all  styles  of  technique — textile, 
plastic,  graphic,  glyphic,  tonic,  and  landscape.  For  them  the  earth 
not  only  furnishes  the  raw  stuffs,  but  the  apparatus  and  different 
motives  to  different  races. 

Before  quitting  the  subject  of  the  study  of  the  earth  as  a  ware- 
house the  student  ought  not  to  overlook  the  varied  characteristics 
of  these  resources.  The  qualities  of  things  are  the  earth's,  the 
grains  and  colors  of  the  same  stone,  the  elasticity  and  fibers  of  timber, 
the  plasticity  and  temper  of  clays,  the  malleability  and  ductility 
of  the  same  metals,  and  so  on.  So  marked  are  these  that  in  our 
higher  civilization  we  must  have  iron  from  half  a  dozen  countries 
to  conduct  one  of  our  complex  establishments.  The  very  diversity 
of  the  same  material  from  place  to  place  has  resulted  in  the  production 
of  the  greatest  possible  variety  of  skill. 

The  earth  is  also  the  reservoir  of  all  locomotion  and  power  useful 
to  man.  Even  the  strength  of  his  own  limbs  and  back  is  derived 
from  the  food  which  she  bestows.  I  do  not  speak  of  that,  however, 
but  of  the  substitutes  therefor.  She  gives  to  the  North  American 
Indians  the  dog,  to  the  South  American  the  llama,  to  the  people  of 
the  eastern  continent  the  horse,  ass,  camel,  elephant,  and  ox  to  convey 
them  about  and  to  carry  or  draw  their  loads. 

The  winds  blow  upon  the  sails  and  turn  the  mills,  the  waters 
set  in  motion  the  wheels  and  transport  the  freight.  The  steam 
is  a  still  more  versatile  genius  of  power,  and  electricity  just  enters 
upon  its  mission.  Coal,  as  a  cheap  source  of  energy,  enables  men 
to  substitute  for  areas  of  raw  material  areas  of  manufacture  and, 
indeed,  to  create  areas  of  consumption. 

The  several  kingdoms  and  forces  of  nature  give  rise  to  their 
several  bodies  of  arts,  each  of  which  springs  from  the  earth. 

It  would  occupy  too  much  space  were  I  to  elaborate  in  the  most 
elementary  manner  the  methods  in  which  domestic  animals,  wind, 
fire,  water,  elasticity  of  solids,  elasticity  of  gases,  explosives,  chemical 
action,  magnetism,  and  electricity  had  enrolled  themselves  in  the 
service  of  mankind  merely  to  furnish  power  to  do  the  work  that  in 
the  simplest  form  is  done  by  hand.  Every  one  of  them  must  have 
struck  terror  into  the  hearts  of  the  first  men.  By  being  subdued 
they  obeyed  the  principle  of  increasing  their  own  usefulness  and 
indispensableness  by  creating  and  complicating  new  wants. 


60  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  form  of  the  globe,  its  coast  lines,  elevations  and  reliefs, 
the  amount  of  sunshine,  the  properties  and  contents  of  the  atmos- 
phere, the  var}'ing  temperatures,  winds,  rainfalls,  and  springs  beneath 
the  surface,  the  waterfalls  in  the  surface  also  act  as  motives,  if  not 
as  moti\e  power  to  all  apparatus  an'd  all  the  movements  of  men. 
We  cannot  eliminate  the  heavenly  bodies  from  this  enumeration, 
since  they  furnished  clocks  and  almanacs  and  compasses  to  primitive 
peoples,  and  longer  voyages  were  undertaken  by  their  guidance  in 
the  Pacific  than  were  made  two  centuries  later  in  the  Atlantic  by 
Columbus  with  the  aid  of  the  mariner's  compass. 

Exploitation  and  cultivation,  manufacture,  transportation, 
exchange,  consumption,  as  I  have  previously  said,  together  con- 
stitute the  round  through  which  commodities  are  conducted  in  the 
progress  of  industries.  The  proposition  is  that  the  earth  was  in 
the  beginning  and  is  now  the  teacher  of  these  activities.  There 
were  quarriers,  miners,  lumberers,  gleaners,  and,  some  say,  planters; 
there  were  fishermen,  fowlers,  trappers,  and  hunters  before  there 
was  a  genus  homo.  There  were  also  manufacturers  in  clay,  in  textiles, 
and  in  animal  substances  before  there  were  potters,  weavers,  and 
furriers;  there  were  all  sorts  of  moving  material  and  carrying  passen- 
gers and  engineering  of  the  simplest  sort.  It  might  be  presumption 
to  hint  that  there  existed  a  sort  of  barter,  but  the  exchange  of  care 
and  food  for  the  honeyed  secretions  of  the  body  going  on  between 
the  ants  and  the  aphidae  look  very  much  like  it. 

In  all  this,  the  race  has  grown,  not  independent  of  the  earth, 
but  more  dependent  upon  it.  Artificial  and  domesticated  supplies 
of  material  are  as  much  from  the  earth  as  the  wildest.  Men  in 
devising  tools  and  machinery  and  engines  to  do  the  work  of  their 
hands  have  had  to  go  to  their  mother  for  them.  They  use  other 
forces  than  their  own,  but  they  are  still  forces  furnished  by  the 
earth.  They  have  multiplied  invention  upon  invention,  but  every 
one  of  them  is  a  device  for  using  a  great  loan  already  in  hand  for 
the  purpose  of  raising  a  larger  one. 

In  this  partnership  between  man  and  the  earth  the  progress 
of  culture  has  been  from  naturalism  to  artificialism;  from  exploita- 
tion to  cultivation  and  domestication;  from  mere  muscular  power 
to  more  subtle  physical  force  of  man,  of  beast,  of  water,  of  air,  of 
fire,  of  electricity;  from  tools  to  machinery;  from  simplest  imitative 
processes  to  highly  complex  processes,  involving   many  materials 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  6 1 

and  motive  powers  and  inventions;  from  short  Journeys  to  long 
journeys;  from  mere  barter  to  world-embracing  commerce;  from 
monotonous  and  monorganic  food  and  clothing,  shelter  and  furniture, 
mental  and  social  appliances  to  forms  as  complex  and  varied  as  the 
imagination  can  conceive.  And  when  the  supply  gives  out,  it  is 
not  the  earth  that  fails,  but  it  is  the  comprehension  and  the  skill  of 
men. 

i8.   THE  INFLUENCE  OF  GEOGRAPHIC  FACTORS' 

In  every  problem  of  history  there  are  two  main  factors,  variously 
stated  as  heredity  and  environment,  man  and  his  geographic  con- 
ditions, the  internal  forces  of  race  and  the  external  forces  of  habitat. 
Now  the  geographic  element  in  the  long  history  of  human  develop- 
ment has  been  operating  strongly  and  operating  persistently.  Herein 
lies  its  importance.  It  is  a  stable  force.  It  never  sleeps.  This 
natural  environment,  this  physical  basis  of  history,  is  for  all  intents 
and  purposes  immutable  in  comparison  with  the  other  factor  in  the 
problem — shifting,  plastic,  progressive,  retrogressive  man. 

History  tends  to  repeat  itself  largely  owing  to  this  steady, 
unchanging  geographic  element.  If  the  ancient  Roman  consul  in 
far-away  Britain  often  assumed  an  independence  of  action  and 
initiative  unknown  to  the  provincial  governors  of  Gaul,  and  if  cen- 
turies later  Roman  Catholicism  in  England  maintained  a  similar 
independence  toward  the  Holy  See,  both  facts  have  their  cause 
in  the  remoteness  of  Britain  from  the  center  of  political  or  eccle- 
siastical power  in  Rome.  If  the  independence  of  the  Roman  consul 
in  Britain  was  duplicated  later  by  the  attitude  of  the  Thirteen 
Colonies  toward  England,  and  again  within  the  young  republic 
by  the  headstrong  self-reliance,  impatient  of  government  authority, 
which  characterized  the  early  trans- Allegheny  commonwealths  in 
their  aggressive  Indian  policy,  and  led  them  to  make  war  and  con- 
clude treaties  for  the  cession  of  land  like  sovereign  states;  and  if 
this  attitude  of  independence  in  the  over-mountain  men  reappeared 
in  a  spirit  of  poUtical  defection  looking  toward  secession  from  the 
Union  and  a  new  combination  with  their  British  neighbor  on  the 
Great  Lakes  or  the  Spanish  beyond  the  Mississippi,  these  are  all  the 
identical  effects  of  geographical  remoteness  made  yet  more  remote 
by  barriers  of  mountain  and  sea. 

'  Adapted  from  Ellen  Churchill  Semple,  Influences  of  Geographic  Environ- 
ment, pp.  2-20.     Henry  Holt  &  Co.,  1911. 


62  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

As  the  surface  of  the  earth  presents  obstacles,  so  it  offers 
channels  for  the  easy  movement  of  humanity,  grooves  whose  direc- 
tion determines  the  destination  of  unknowing,  unplanned  migrations, 
and  whose  termini  become,  therefore,  regions  of  historical  importance. 
Along  these  nature-made  highways  history  repeats  itself.  The  mari- 
time plain  of  Palestine  has  been  an  established  route  of  commerce 
and  war  from  the  time  of  Sennacherib  to  Napoleon,  The  Danube 
valley  has  admitted  to  central  Europe  a  long  list  of  barbarian  invaders, 
covering  the  period  from  Attila  the  Hun  to  the  Turkish  besiegers  of 
Vienna  in  16S3.  The  history  of  the  Danube  valley  has  been  one  of 
warring  throngs,  of  shifting  political  frontiers,  and  unassimilated 
races;  but  as  the  river  is  a  great  natural  highway,  every  neighboring 
state  wants  to  front  upon  it  and  strives  to  secure  it  as  a  boundary. 

The  movements  of  peoples  constantly  recur  to  these  old  grooves. 
The  unmarked  path  of  the  voyageur's  canoe,  bringing  out  pelts 
from  Lake  Superior  to  the  fur  market  at  Montreal,  is  followed  to-day 
by  whaleback  steamers  with  their  cargoes  of  Manitoba  wheat.  Today 
the  Mohawk  depression  through  the  northern  Appalachians  diverts 
some  of  Canada's  trade  from  the  Great  Lakes  to  the  Hudson,  just 
as  in  the  seventeenth  century  it  enabled  the  Dutch  at  New  Amster- 
dam and  later  the  English  at  Albany  to  tap  the  fur  trade  of  Canada's 
frozen  forests.  Formerly  a  line  of  stream  and  portage,  it  carries  now 
the  Erie  Canal  and  New  York  Central  Railroad.  Similarly  the  nar- 
row level  belt  of  land  extending  from  the  mouth  of  the  Hudson  to  the 
eastern  elbow  of  the  lower  Delaware,  defining  the  outer  margin  of  the 
rough  hill  country  of  northern  New  Jersey  and  the  inner  margin  of 
the  smooth  coastal  plain,  has  been  from  savage  days  such  a  natural 
thoroughfare.  Here  ran  the  trail  of  the  Lenni-Lenapi  Indians;  a 
little  later  the  old  Dutch  road,  between  New  Amsterdam  and  the 
Delaware  trading-posts;  yet  later  the  King's  Highway  from  New 
York  to  Philadelphia.  In  1838  it  became  the  route  of  the  Delaware 
and  Raritan  Canal,  and  more  recently  of  the  Pennsylvania  Railroad 
between  New  York  and  Philadelphia. 

The  great  belt  of  deserts  and  steppes  extending  across  the  Old 
World  gives  us  a  vast  territory  of  rare  historical  uniformity.  From 
time  immemorial  they  have  borne  and  bred  tribes  of  wandering 
herdsmen ;  they  have  sent  out  the  invading  hordes  who,  in  successive 
waves  of  conquest,  have  overwhelmed  the  neighboring  river  lowlands 
of  Eurasia  and  Africa.  They  have  given  birth  in  turn  to  Scythians, 
Indo-Aryans,  Avars,  Huns,  Saracens,  Tartars,  and  Turks,  as  to  the 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  63 

Tuareg  tribes  of  the  Sahara,  the  Sudanese,  and  Bantu  folk  of  the 
African  grasslands.  But  whether  these  various  peoples  have  been 
Negroes,  Hamites,  Semites,  Indo-Europeans,  or  Mongolians,  they 
have  always  been  pastoral  nomads.  The  description  given  by 
Herodotus  of  the  ancient  Scythians  is  applicable  in  its  main  features 
to  the  Kirghis  and  Kalmuk  who  inhabit  the  Caspian  plains  today. 
The  environment  of  this  dry  grassland  operates  now  to  produce  the 
same  mode  of  life  and  social  organization  as  it  did  2,400  years  ago; 
stamps  the  cavalry  tribes  of  Cossacks  as  it  did  the  mounted  Huns; 
energizes  its  sons  by  its  dry  bracing  air,  toughens  them  by  its  harsh 
conditions  of  life,  organizes  them  into  a  mobilized  army,  always  mov- 
ing with  its  pastoral  commissariat.  Then  when  population  presses 
too  hard  upon  the  meager  sources  of  subsistence,  when  a  smnmer 
drought  burns  the  pastures  and  dries  up  the  water-holes,  it  sends 
them  forth  on  a  mission  of  conquest,  to  seek  abundance  in  the  better 
watered  lands  of  their  agricultural  neighbors. 

Owing  to  the  evolution  of  geographic  relations,  the  physical 
environment  favorable  to  one  stage  of  development  may  be  adverse 
to  another,  and  vice  versa.  For  instance,  a  small,  isolated,  and 
protected  habitat,  like  that  of  Egypt,  Phoenicia,  Crete,  and  Greece, 
encourages  the  birth  and  precocious  growth  of  civilization;  but 
later  it  may  cramp  progress,  and  lend  the  stamp  of  arrested  develop- 
ment to  a  people  who  were  once  the  model  for  all  their  little  world. 
Open  and  wind-swept  Russia,  lacking  these  small  warm  nurseries 
where  Nature  could  cuddle  her  children,  has  bred  upon  its  bound- 
less plains  a  massive,  untutored,  homogeneous  folk,  fed  upon  the 
criunbs  of  culture  that  have  fallen  from  the  richer  tables  of 
Europe.  But  that  item  of  area  is  a  variable  quantity  in  the 
equation.  It  changes  its  character  at  a  higher  state  of  cultural 
development.  Consequeptly,  when  the  Muscovite  people,  instructed 
by  the  example  of  western  Europe,  shall  have  grown  up  intellectu- 
ally, economically,  and  pohtically  to  their  big  territory,  its  area 
will  become  a  great  national  asset.  Russia  will  come  into  its 
own,  heir  to  a  long-withheld  inheritance.  Many  of  its  previous 
geographic  disadvantages  will  vanish,  like  the  diseases  of  child- 
hood, while  its  massive  size  will  dwarf  many  previous  advantages 
of  its  European  neighbors. 

Let  us  consider  the  interplay  of  the  forces  of  land  and  sea  apparent 
in  every  coimtry  with  a  maritime  location.  In  some  cases  a  small, 
infcilile,  niggardly  coimtry  conspires  with  a  beckoning  sea  to  drive 


64  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

its  sons  out  upon  the  deep;  in  others  a  wide  territory  with  a  generous 
soil  keeps  its  well-fed  children  at  home  and  silences  the  call  of  the 
sea.  In  ancient  Phoenicia  and  Greece,  in  Norway,  Finland,  New 
England,  in  savage  Chile  and  Tierra  del  Fuego,  and  the  Indian  coast 
district  of  British  Columbia,  and  southern  Alaska,  a  long,  broken 
shoreline,  numerous  harbors,  outlying  islands,  abundant  timber  for 
the  construction  of  ships,  difficult  communication  by  land,  all  tempted 
the  inhabitants  to  a  sea-faring  life.  While  the  sea  drew,  the  land 
drove  in  the  same  direction.  There  a  hilly  or  mountainous  interior 
putting  obstacles  in  the  way  of  landward  expansion,  sterile  slopes, 
a  paucity  of  level,  arable  land,  an  excessive  or  deficient  rainfall 
withholding  from  agriculture  the  rewards  of  tillage — some  or  all  of 
these  factors  combined  to  compel  the  inhabitants  to  seek  on  the  sea 
the  livelihood  denied  by  the  land.  Here  both  forces  worked  in  the 
same  direction. 

In  England  conditions  were  much  the  same,  and  from  the  six- 
teenth century  produced  there  a  predominant  maritime  development 
which  was  due  not  solely  to  a  long  indented  coastline  and  an  excep- 
tional location  for  participating  in  European  and  American  trade. 
Its  limited  island  area,  its  large  extent  of  rugged  hills  and  chalky 
soil  fit  only  for  pasturage,  and  the  lack  of  a  really  generous  natural 
endowment  made  it  slow  to  answer  the  demands  of  a  growing  popu- 
lation, till  the  industrial  development  of  the  nineteenth  century 
exploited  its  mineral  wealth.  So  the  English  turned  to  the  sea — to 
fish,  to  trade,  to  colonize.  Holland's  conditions  made  for  the  same 
development.  She  united  advantages  of  coastline  and  position  with 
a  small  infertile  territory,  consisting  chiefly  of  water-soaked  grazing 
lands.  When  at  the  zenith  of  her  maritime  development,  a  native 
authority  estimated  that  the  soil  of  Holland  could  not  support  more 
than  one-eighth  of  her  inhabitants.  The  meager  products  of  the 
land  had  to  be  eked  out  by  the  harvest  of  the  sea.  Fish  assumed 
an  important  place  in  the  diet  of  the  Dutch,  and  when  a  process  of 
curing  it  was  discovered,  laid  the  foundation  of  Holland's  export 
trade.  A  geographical  location  central  to  ^e  Baltic  and  North 
Sea  countries,  and  accessible  to  France  and  Portugal,  combined  with 
a  position  at  the  mouth  of  the  great  German  rivers,  made  it  absorb 
the  carrying  trade  of  northern  Europe.  Land  and  sea  co-operated  in 
its  maritime  development. 

Often  the  forces  of  land  and  sea  are  directly  opposed.  If  a 
country's  geographic  conditions  are  favorable  to  agriculture  and 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  6$ 

offer  room  for  growth  of  population,  the  land  forces  prevail,  because 
man  is  primarily  a  terrestrial  animal.  Such  a  country  illustrates 
what  Chisholm,  with  Attic  nicety  of  speech,  calls  "the  influence  of 
bread-power  on  history,"  as  opposed  to  Mahan's  sea-power.  France, 
like  England,  had  a  long  coastline,  abundant  harbors,  and  an  excellent 
location  for  maritime  supremacy  and  colonial  expansion;  but  her 
larger  area  and  greater  amount  of  fertile  soil  put  off  the  hour  of  a 
redmidant  population  such  as  England  suffered  from,  even  in  Henry 
VIII's  time.  Moreover,  in  consequence  of  steady  continental  expan- 
sion from  the  twelfth  to  the  eighteenth  century  and  a  political  imi- 
fication  which  made  its  area  more  effective  for  the  support  of  the 
people,  the  French  of  Richelieu's  time,  except  those  from  certain 
districts,  took  to  the  sea,  not  by  natural  impulse  as  did  the  English 
and  Dutch,  but  rather  under  the  spur  of  government  initiative. 
They  therefore  achieved  far  less  in  maritime  trade  and  colonization. 
In  ancient  Palestine,  a  long  stretch  of  coast,  poorly  equipped  with 
harbors,  but  accessible  to  the  rich  Mediterranean  trade,  failed  to 
offset  the  attractions  of  the  gardens  and  orchards  of  the  Jordan 
valley  and  the  pastures  of  the  Judean  hills,  or  to  overcome  the  land- 
bom  predilections  and  aptitudes  of  the  desert-bred  Jews.  Similarly 
the  river-fringed  peninsulas  of  Virginia  and  Maryland,  opening  wide 
their  doors  to  the  incoming  sea,  were  powerless,  nevertheless,  to 
draw  the  settlers  away  from  the  riotous  productiveness  of  the  wide 
tidewater  plains.  Here  again  the  geographic  force  of  the  land  out- 
weighed that  of  the  sea  and  became  the  dominant  factor  in  directing 
the  activities  of  the  inhabitants. 

Heinrich  von  Treitschke,  in  his  recent  Politik,  imitates  the  direct 
inference  of  Buckle  when  he  ascribes  the  absence  of  artistic  and 
poetic  development  in  Switzerland  and  the  Alpine  lands  to  the 
overwhelming  aspect  of  nature  there,  its  majestic  sublimity  which 
paralyzes  the  mind.  He  reinforces  his  position  by  the  fact  that, 
by  contrast,  the  lower  mountains  and  hill  country  of  Swabia,  Fran- 
conia,  and  Thuringia,  where  nature  is  gentler,  stimulating,  appealing, 
and  not  overpowering,  have  produced  many  poets  and  artists.  The 
facts  are  incontestable.  They  appear  in  France  in  the  geographical 
distribution  of  the  awards  made  by  the  Paris  Salon  of  1896.  Judg- 
ing by  these  awards  the  rough  highlands  of  Savoy,  Alpine  Provence, 
the  massive  eastern  Pyrenees,  and  the  Auvergne  plateau,  together 
with  the  barren  peninsula,  Brittany,  are  singularly  lacking  in  artistic 
instinct,   while  art  flourishes  in   all   the  river  lowlands  of  France 


66  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Moreover,  French  men  of  letters,  by  the  distribution  of  their  birth- 
places, are  essentially  products  of  fluvial  valleys,  and  plains,  rarely 
of  upland  and  mountain. 

This  contrast  has  been  ascribed  to  a  fundamental  ethnic  dis- 
tinction between  the  Teutonic  population  of  the  lowlands  and  the 
Alpine  or  Celtic  stock  which  survives  in  the  protected  isolation  of 
highland  and  peninsula,  thus  making  talent  an  attribute  of  race. 
But  the  Po  valley  of  northern  Italy,  whose  population  contains  a 
strong  infusion  of  this  supposedly  stultifying  Alpine  blood,  and  the 
neighboring  lowlands  and  hill  country  of  Tuscany  show  an  enormous 
preponderance  of  intellectual  and  artistic  power  over  the  highlands 
of  the  peninsula.  Hence  the  same  contrast  appears  among  different 
races  under  like  geographic  conditions.  Moreover,  in  France,  other 
social  phenomena,  such  as  suicide,  divorce,  decreasing  birth-rate, 
and  radicalism  in  politics  show  this  same  startling  parallelism  of 
geographic  distribution;  and  these  cannot  be  attributed  to  the  stimu- 
lating or  depressing  effect  of  natural  scenery  on  the  human  mind. 

Mountain  regions  discourage  the  budding  of  genius  because  they 
are  areas  of  isolation,  confinement,  remote  from  the  great  currents 
of  men  and  ideas  that  move  along  the  river  valleys.  They  are 
regions  of  much  labor  and  little  leisure,  of  poverty  today  and  anxiety 
for  the  morrow,  of  toil-cramped  hands  and  toil-dulled  brains.  In 
the  fertile  alluvial  plains  are  wealth,  leisure,  contact  with  many  minds, 
large  urban  centers  where  commodities  and  ideas  are  exchanged. 
The  two  contrasted  environments  produce  directly  certain  economic 
and  social  results,  wliich  in  turn  become  the  causes  of  secondary 
intellectual  and  artistic  effects.  The  low  mountains  of  central 
Germany  which  von  Treitschke  cites  as  homes  of  poets  and  artists, 
owing  to  abundant  and  varied  mineral  wealth,  are  the  seats  of  active 
industries  and  dense  populations,  while  their  low  reliefs  present  no 
serious  obstacle  to  the  numerous  highways  across  them.  They, 
therefore,  afford  all  conditions  for  culture. 

•       19.   THE  FRONTIER  IN  AMERICAN  HISTORY' 

Behind  institutions,  behind  constitutional-  forms  and  modifica- 
tions lie  the  vital  forces  that  call  these  organs  into  life  and  shape 
them  to  meet  changing  conditions.    The  peculiarity  of  American 

'  Adapted  from  F.  J.  Turner,  The  Significance  of  the  Frontier  in  American 
History,  in  the  Fijth  Year  Book  of  the  National  Herbart  Society,  and  an  earlier 
edition  in  American  Historical  Association,  Report,  1893,  pp.  199-227. 


N 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  67 

institutions  is  the  fact  that  they  have  been  compelled  to  adapt  them- 
selves to  the  changes  of  an  expanding  people — to  the  change  involved 
in  crossing  a  continent,  in  winning  a  wilderness,  and  in  developing 
at  each  area  of  this  progress  out  of  the  primitive  economic  and  politi- 
cal conditions  of  the  frontier  into  the  complexity  of  city  life.  Ameri- 
can development  has  exhibited  not  merely  advance  along  a  single 
line,  but  a  return  to  primitive  conditions  on  a  continually  advancing 
frontier  line,  and  a  new  development  for  that  area.  American 
social  development  has  been  continually  beginning  over  again 
on  the  frontier.  This  perennial  rebirth,  this  fluidity  of  American 
life,  this  expansion  westward  with  its  new  opportunities,  its 
continuous  touch  with  the  simplicity  of  primitive  society,  furnish 
the  forces  dominating  American  character.  The  true  point  of 
view  in  the  history  of  this  nation  is  not  the  Atlantic  coast:  it 
is  the  great  West.  Even  the  slavery  struggle,  which  is  made 
so  exclusive  an  object  of  attention  by  some  historians,  occupies 
its  important  place  in  American  history  because  of  its  relation  to 
westward  expansion. 

At  first  the  frontier  was  the  Atlantic  coast.  It  was  the  frontier  of 
Europe  in  a  very  real  sense.  Moving  westward,  the  frontier  became 
more  and  more  American.  As  successive  terminal  moraines  result 
from  successive  glaciations,  so  each  frontier  leaves  its  traces  behind  it, 
and  when  it  becomes  a  settled  area  the  region  still  partakes  of  its 
frontier  characteristics.  Thus  the  advance  of  the  frontier  has  meant 
a  steady  movement  away  from  the  influence  of  Europe,  a  steady 
growth  of  independence  on  American  lines.  And  to  study  this  ad- 
vance, the  men  who  grew  up  under  these  conditions,  and  the  poUtical, 
economic,  and  social  results  of  it,  is  to  study  the  really  American 
part  of  our  history. 

Composite  nationality. — First,  we  note  that  the  frontier  promoted 
the  formation  of  a  composite  nationality  for  the  American  people. 
The  coast  was  preponderantly  English,  but  the  later  tides  of  con- 
tinental immigration  flowed  across  to  the  free  lands. 

In  the  crucible  of  the  frontier  the  immigrants  were  American- 
ized, liberated,  and  fused  into  a  mixed  race,  English  in  neither 
nationality  nor  characteristics.  The  process  has  gone  on  from  the 
early  days  to  our  own.  Burke  and  other  writers  in  the  middle  of 
the  eighteenth  century  believed  that  Pennsylvania  was  "  threatened 


68  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

with  the  danger  of  being  wholly  foreign  in  language,  manners,  and 
perhaps  even  inclinations."  The  German  and  Scotch-Irish  elements 
in  the  frontier  of  the  South  were  only  less  great.  In  the  middle  of  the 
present  century  the  German  element  in  Wisconsin  was  already  so 
considerable  that  leading  publicists  looked  to  the  creation  of  a  German 
state  out  of  the  commonwealth  by  concentrating  their  colonization. 
By  the  census  of  1890  South  Dakota  had  a  percentage  of  persons  of 
foreign  parentage  to  total  population  of  sixty;  Wisconsin,  seventy- 
three;  Minnesota,  seventy-five;  and  North  Dakota,  seventy-nine. 
Such  examples  teach  us  to  beware  of  misinterpreting  the  fact  that 
there  is  a  common  English  speech  in  America  into  a  belief  that  the 
stock  is  also  English. 

Industrial  independence. — In  another  way  the  advance  of  the 
frontier  decreased  our  dependence  on  England.  The  coast,  particu- 
larly of  the  South,  lacked  diversified  industries,  and  was  dependent 
on  England  for  the  bulk  of  its  supplies.  Before  long  the  frontier 
created  a  demand  for  merchants.  As  it  retreated  from  the  coast 
it  became  less  and  less  possible  for  England  to  bring  her  supplies 
directly  to  the  consumers'  wharfs,  and  carry  away  staple  crops,  and 
staple  crops  began  to  give  way  to  diversified  agriculture  for  a  time. 

Effects  on  national  legislation. — The  legislation  which  most  de- 
veloped the  power  of  the  national  government,  and  played  the  largest 
part  in  its  activity,  was  conditioned  on  the  frontier.  Writers  have 
discussed  the  subjects  of  tariff,  land,  and  internal  improvement  as 
subsidiary  to  the  slavery  question.  But  when  American  history  comes 
to  be  rightly  viewed  it  will  be  seen  that  the  slavery  question  is  an 
incident.  The  growth  of  nationalism  and  the  evolution  of  American 
political  institutions  were  dependent  on  the  advance  of  the  frontier. 
The  pioneer  needed  the  goods  of  the  coast,  and  so  the  grand  series  of 
internal  improvement  and  railroad  legislation  began,  with  potent 
nationalizing  effects.  Over  internal  improvements  occurred  great 
debates,  in  which  grave  constitutional  questions  were  discussed. 
Sectional  groupings  appear  in  the  votes,  profoundly  significant  for 
the  historian.  Loose  construction  increased  as  the  nation  marched 
westward.  But  the  West  was  not  content  with  bringing  the  farm  to 
the  factory.  Under  the  lead  of  Clay — "Harry  of  the  West" — pro- 
tective tariffs  were  passed,  with  the  cry  of  bringing  the  factory  to 
the  farm. 

Effects  on  institutions. — It  is  hardly  necessary  to  do  more  than 
mention  the  fact  that  the  West  was  a  field  in  which  new  political 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  69 

institutions  were  to  be  created.  It  offered  a  wide  opportunity  for 
speculative  creation  and  for  adjustment  of  old  institutions  to  new 
conditions.  Tlie  study  of  the  evolution  of  western  institutions  shows 
how  slight  was  the  proportion  of  actual  theoretic  invention  of  institu- 
tions; but  there  is  abundance  of  opportunity  for  study  of  the  sources 
of  the  institutions  actually  chosen,  the  causes  of  the  selection,  the 
degree  of  transformation  by  the  new  conditions,  and  the  new  institu- 
tions actually  produced  by  the  new  environment. 

The  public  domain. — The  public  domain  has  been  a  force  of  pro- 
found importance  in  the  nationalization  and  development  of  the 
government.  The  effects  of  the  struggle  of  the  landed  and  the  land- 
less states,  and  of  the  ordinance  of  1787,  need  no  discussion.  Ad- 
ministratively the  frontier  called  out  some  of  the  highest  and  most 
vitalizing  activities  of  the  general  government.  The  purchase  of 
Louisiana  was  perhaps  the  constitutional  turning  point  in  the  history 
of  the  republic,  inasmuch  as  it  afforded  both  a  new  area  for  national 
legislation  and  the  occasion  of  the  downfall  of  the  policy  of  strict 
construction.  But  the  purchase  of  Louisiana  was  called  out  by 
frontier  needs  and  demands.  As  frontier  states  accrued  to  the  Union 
the  national  power  grew. 

When  we  consider  the  public  domain  from  the  point  of  view  of 
the  sale  and  disposal  of  the  public  lands,  we  are  again  brought  face 
to  face  with  the  frontier.  The  policy  of  the  United  States  in  dealing 
with  its  lands  is  in  sharp  contrast  with  the  European  system  of 
scientific  administration.  Efforts  to  make  this  domain  a  source  of 
revenue,  and  to  withhold  it  from  emigrants  in  order  that  settlement 
might  be  compact,  were  in  vain.  The  jealousy  and  the  fears  of  the 
East  were  powerless  in  the  face  of  the  demands  of  the  frontiersmen. 
John  Quincy  Adams  was  obliged  to  confess:  "My  own  system  of 
administration,  which  was  to  make  the  national  domain  the  inexhaust- 
ible fund  for  progressive  and  unceasing  internal  improvement,  has 
failed."  The  reason  is  ob\'ious;  a  system  of  administration  was  not 
what  the  West  demanded;  it  wanted  land. 

National  Tendencies  of  the  frontier. — It  is  safe  to  say  that  the 
legislation  with  regard  to  land,  tariff,  and  internal  improvements — 
the  American  system  of  the  nationalizing  Whig  party —  was  con- 
ditioned on  frontier  ideas  and  needs.  But  it  was  not  merely  in  legis- 
lative action  that  the  frontier  worked  against  the  sectionalism  of  the 
coast.  The  economic  and  social  characteristics  of  the  frontier 
worked  against  sectionalism.     The  men  of  the  frontier  had  closer 


7©  MATERIALS  FOR  ELEMENTARY  ECONOMICS  * 

resemblances  to  the  middle  region  than  to  either  of  the  other  sections. 
Pennsylvania  had  been  the  seed  plot  of  southern  frontier  emigration, 
and  although  she  passed  on  her  settlers  along  the  Great  Valley  into 
the  west  of  Virginia  and  the  Carolinas,  yet  the  industrial  society  of 
these  southern  frontiersmen  was  always  more  like  that  of  the  middle 
region  than  like  that  of  the  tidewater  portion  of  the  South,  which 
later  came  to  spread  its  industrial  type  throughout  the  South. 

The  middle  region,  entered  by  New  York  harbor,  was  an  open 
door  to  all  Europe.  The  tidewater  part  of  the  South  represented 
typical  Enghshmen,  modified  by  a  warm  climate  and  servile  labor, 
and  living  in  baronial  fashion  on  great  plantations;  New  England 
stood  for  a  special  English  movement — Puritanism.  The  middle 
region  was  less  English  than  the  other  sections.  It  had  a  wide 
mixture  of  nationalities,  a  varied  society,  the  mixed  town  and  coimty 
system  of  local  government,  a  varied  economic  life,  many  religious 
sects.  In  short,  it  was  a  region  mediating  between  New  England 
and  the  South,  and  the  East  and  the  West.  It  represented  the  com- 
posite nationality  which  the  contemporary  United  States  exhibits, 
that  juxtaposition  of  non-English  groups,  occupying  a  valley  or  a 
Uttle  settlement,  and  presenting  reflections  of  the  map  of  Europe  in 
their  variety.  It  was  democratic  and  non-sectional,  if  not  national; 
"easy,  tolerant,  and  contented";  rooted  strongly  in  material  pros- 
perity. It  was  typical  of  the  modern  United  States.  It  was  least 
sectional,  not  only  because  it  lay  between  North  and  South,  but  also 
because  with  no  barriers  to  shut  out  its  frontiers  from  its  settled 
region,  and  with  a  system  of  connecting  waterways,  the  middle 
region  mediated  between  East  and  West  as  well  as  between  North 
and  South.  Thus  it  became  the  typically  American  region.  Even 
the  New  Englander,  who  was  shut  out  from  the  frontier  by  the 
middle  region,  tarrying  in  New  York  or  Pennsylvania  on  his  westward 
march,  lost  the  acuteness  of  his  sectionalism  on  the  way. 

Growth  of  democracy. — But  the  most  important  effect  of  the  frontier 
has  been  in  the  promotion  of  democracy  here  and  in  Europe.  As  has 
been  indicated,  the  frontier  is  productive  of  individualism.  Complex 
society  is  precipitated  by  the  wilderness  into  a  kind  of  primitive 
organization  based  on  the  family.  The  tendency  is  anti-social.  It 
produces  antipathy  to  control,  and  particularly  to  any  direct  control. 

The  frontier  states  that  came  into  the  Union  in  the  first  quarter 
of  a  century  of  its  existence  came  in  with  democratic  suffrage  provi- 
sions, and  had  reactive  effects  of  the  highest  importance  upon  the 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  71 

older  states  whose  peoples  were  being  attracted  there.  An  extension 
of  the  franchise  became  essential.  It  was  western  New  York  that 
forced  an  extension  of  suffrage  in  the  constitutional  convention  of 
that  state  in  1821;  and  it  was  western  Virginia  that  compelled  the 
tidewater  region  to  put  a  more  Uberal  suffrage  provision  in  the  con- 
stitution framed  in  1830,  and  to  give  to  the  frontier  region  a  more 
nearly  proportionate  representation  with  the  tidewater  aristocracy. 
The  rise  of  democracy  as  an  effective  force  in  the  nation  came  in  with 
western  preponderance  under  Jackson  and  William  Henry  Harrison, 
and  it  meant  the  triumph  of  the  frontier — with  all  of  its  good 
and  with  all  of  its  evil  element. 

So  long  as  free  land  exists,  the  opportunity  for  a  competency 
exists,  and  economic  power  secures  political  power.  But  the  democ- 
racy born  of  free  land,  strong  in  selfishness  and  individualism,  intoler- 
ant of  administrative  experience  and  education,  and  pressing  indi- 
vidual liberty  beyond  its  proper  bounds,  has  its  dangers  as  well  as 
its  benefits.  Individualism  in  America  has  allowed  a  laxity  in  regard 
to  governmental  affairs  which  has  rendered  possible  the  spoils  system 
and  all  the  manifest  evils  that  follow  from  the  lack  of  a  highly  devel- 
oped civic  spirit.  In  this  connection  may  be  noted  also  the  influence 
of  frontier  conditions  in  permitting  inflated  paper  currency  and  wild- 
cat banking.  The  colonial  and  revolutionary  frontier  was  the  region 
whence  emanated  many  of  the  worst  forms  of  paper  currency.  The 
West  in  the  War  of  18 12  repeated  the  phenomenon  on  the  frontier 
of  that  day,  while  the  speculation  and  wild-cat  banking  of  the  period 
of  the  crisis  of  1837  occurred  on  the  new  frontier  belt  of  the  next  tier 
of  states.  Thus  each  one  of  the  periods  of  paper-money  projects 
coincides  with  periods  when  a  new  set  of  frontier  communities  had 
arisen,  and  coincides  in  area  with  these  successive  frontiers,  for  the 
most  part.  The  recent  radical  Populist  agitation  is  a  case  in  point. 
Many  a  state  that  now  declines  any  connection  with  the  tenets  of  the 
Populists  itself  adhered  to  such  ideas  in  an  earlier  stage  of  the  develop- 
ment of  the  state.  A  primitive  society  can  hardly  be  expected  to 
show  the  appreciation  of  the  complexity  of  business  interests  in  a 
developed  society.  The  continual  recurrence  of  these  areas  of  paper- 
money  agitation  is  another  evidence  that  the  frontier  can  be  isolated 
and  studied  as  a  factor  in  American  history  of  the  highest  importance. 

Intellectual  traits. — From  the  conditions  of  frontier  life  came 
intellectual  traits  of  profound  importance.    The  works  of  travelers 


72  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

along  each  frontier  from  colonial  days  onward  describe  certain  common 
traits,  and  these  traits  have,  while  softening  down,  still  persisted 
as  survivals  in  the  place  of  their  origin,  even  when  a  higher  social 
organization  succeeded.  The  result  is  that  to  the  frontier  the  Ameri- 
can intellect  owes  its  striking  characteristics.  That  coarseness  and 
strength  combined  with  acuteness  and  inquisitiveness;  that  practical 
inventive  turn  of  mind,  quick  to  find  expedients;  that  masterful 
grasp  of  material  things,  lacking  in  the  artistic,  but  powerful  to  ellect 
great  ends;  that  restless,  nervous  energy;  that  dominant  individual- 
ism, working  for  good  and  for  evil,  and,  withal,  that  buoyancy  and 
exuberance  which  come  with  freedom — these  are  traits  of  the  frontier, 
or  traits  called  out  elsewhere  because  of  the  existence  of  the  frontier. 
We  are  not  easily  aware  of  the  deep  influence  of  this  individualistic 
way  of  thinking  upon  our  present  conditions.  It  persists  in  the 
midst  of  a  society  that  has  passed  away  from  the  conditions  that 
occasioned  it.  It  makes  it  difficult  to  secure  social  regulation  of 
business  enterprises  that  are  essentially  public;  it  is  a  stumbling- 
block  in  the  way  of  civil-service  reform;  it  permeates  our  doctrines 
of  education;  but  with  the  passing  of  the  free  lands  a  vast  extension 
of  the  social  tendency  may  be  expected  in  America. 

Ratzel,  the  well-known  geographer,  has  pointed  out  the  fact  that 
for  centuries  the  great  unoccupied  area  of  America  furnished  to  the 
American  spirit  something  of  its  own  largeness.  It  has  given  a 
largeness  of  design  and  an  optimism  to  American  thought.  Since 
the  days  when  the  fleet  of  Columbus  sailed  into  the  waters  of  the  New 
World,  America  has  been  another  name  for  opportunity,  and  the 
people  of  the  United  States  have  taken  their  tone  from  the  incessant 
expansion  which  has  not  only  been  open,  but  has  even  been  forced 
upon  them.  He  would  be  a  rash  prophet  who  should  assert  that  the 
expansive  character  of  American  life  has  now  entirely  ceased.  Move- 
ment has  been  its  dominant  fact,  and,  unless  this  training  has  no 
effect  upon  a  people,  the  American  energy  will  continually  demand  a 
wider  field  for  its  exercise.  But  never  again  will  such  gifts  of  free 
land  offer  themselves.  For  a  moment,  at  the  frontier,  the  bonds  of 
custom  are  broken  and  unrestraint  is  triumphant.  There  is  not 
tabula  rasa.  The  stubborn  American  environment  is  there  with  its 
imperious  summons  to  accept  its  conditions;  the  inherited  ways  of 
doing  things  are  also  there;  and  yet,  in  spite  of  environment,  and  in 
spite  of  custom,  each  frontier  did  indeed  furnish  a  new  field  of  oppor- 
tunity, a  gate  of  escape  from  the  bondage  of  the  past;  and  freshness. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  73 

and  confidence,  and  scorn  of  older  society,  impatience  of  its  restraints 
and  its  ideas,  and  indifference  to  its  lessons  have  accompanied  the 
frontier.  What  the  Mediterranean  Sea  was  to  the  Greeks,  breaking  the 
bond  of  custom,  offering  new  experienceSj  calling  out  new  institutions 
and  activities,  that,  and  more,  the  ever-retreating  frontier  has  been  to 
the  United  States  directly,  and  to  the  nations  of  Europe  more  remotely. 
And  now,  four  centuries  from  the  discovery  of  America,  at  the  end  of 
a  hundred  years  of  life  under  the  Constitution,  the  frontier  has  gone, 
and  with  its  going  has  closed  the  first  period  of  American  history. 

20.   AN  ILLUSTRATION  OF  THE  LAW  OF  DIMINISHING 

RETURNS 


A 

B 

C 

D 

E 

A  certain  homogeneous  strip  of  land  was  divided  into  five  equal 
parts.  These  equal  areas  had  the  same  exposure  to  the  sun  and 
weather,  and  soil  analysis  demonstrated  that,  humanly  speaking, 
they  were  equal  in  every  particular. 

On  strip  A  the  application  of  100  doses  of  labor,  capital,  and 
organization  resulted  in  a  yield  of  200  bushels  of  product. 

On  strip  B  the  application  of  200  doses  of  precisely  the  same  kinds 
of  labor,  capital,  and  organization  resulted  in  a  yield  of  350  bushels. 
This  yield  was,  of  course,  equivalent  to  200  bushels  for  the  first  100 
doses  and  150  bushels  for  the  second  100  doses. 

On  strip  C  the  application  of  300  doses  of  this  labor,  capital,  and 
organization  resulted  in  a  yield  of  450  bushels  of  product,  or  200 
bushels  for  the  first  100  doses,  150  bushels  for  the  second  100  doses, 
and  100  bushels  for  the  third  100  doses. 

On  strip  D  the  application  of  400  doses  of  this  labor,  capital,  and 
organization  yielded  500  bushels  of  product,  or  200  bushels  for  the 
first  100  doses,  150  bushels  for  the  second  100  doses,  100  bushels 
for  the  third  100  doses,  and  50  bushels  for  the  fourth  100  doses. 

On  strip  E  the  application  of  500  doses  of  this  labor,  capital,  and 
organization  resulted  in  500  bushels  of  product.  Obviously  enough 
the  last  100  doses  of  labor,  capital,  and  organization  yielded  o  bushels 
of  product;  in  other  words  the  returns  to  the  last  100  doses  had 
diminished  to  nothing,  and  the  cultivation  of  the  land  had  reached 
that  stas;e  known  as  maximum  returns. 


74  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

21.  FACTORS  COUNTERACTING  DIMINISfflNG  RETURNS' 

There  is  another  agency,  in  habitual  antagonism  to  the  law  of 
diminishing  return  from  land;  and  to  the  consideration  of  this  we 
shall  now  proceed.  It  is  no  other  than  the  progress  of  civilization. 
I  use  this  general  and  somewhat  vague  expression,  because  the  things 
to  be  included  are  so  various,  that  hardly  any  term  of  a  more  restricted 
signification  would  comprehend  them  all. 

Of  these,  the  most  obvious  is  the  progress  of  agricultural  knowl- 
edge, skill,  and  invention.  Improved  processes  of  agriculture  are  of 
two  kinds:  some  enable  the  land  to  yield  a  greater  absolute  produce, 
without  an  equivalent  increase  of  labor;  others  have  not  the  power  of 
increasing  the  produce,  but  have  that  of  diminishing  the  labor  and 
expense  by  which  it  is  obtained.  Among  the  first  are  to  be  reckoned 
the  disuse  of  fallows,  by  means  of  the  rotation  of  crops;  and  the  intro- 
duction of  new  articles  of  cultivation  capable  of  entering  advan- 
tageously into  the  rotation.  The  change  made  in  British  agriculture 
toward  the  close  of  the  [eighteenth]  century,  by  the  introduction  of  tur- 
nip husbandry,  is  spoken  of  as  amounting  to  a  revolution.  These  im- 
provements operate  not  only  by  enabling  the  land  to  produce  a 
crop  every  year  instead  of  remaining  idle  one  year  in  every  two  or 
three  to  renovate  its  powers,  but  also  by  direct  increase  of  its 
productiveness;  since  the  great  addition  made  to  the  number  of 
cattle  by  the  increase  of  their  food  affords  more  abundant  manure 
to  fertilize  the  corn  lands.  Next  in  order  comes  the  introduction 
of  new  articles  of  food  containing  a  greater  amount  of  sustenance, 
like  the  potato,  or  more  productive  species  or  varieties  of  the  same 
plant,  such  as  the  Swedish  turnip.  In  the  same  class  of  improve- 
ments must  be  placed  a  better  knowledge  of  the  properties  of  ma- 
nures, and  of  the  most  effectual  modes  of  applying  them;  the  intro- 
duction of  new  and  more  powerful  fertilizing  agents,  such  as  guano, 
and  the  conversion  to  the  same  purpose,  of  substances  previously 
wasted;  inventions  like  subsoil-ploughing  or  tile-draining;  improve- 
ments in  the  breed  or  feeding  of  labormg  cattle;  augmented  stock  of 
the  animals  which  consume  and  convert  into  human  food  what  would 
othenv^se  be  wasted;  and  the  like.  The  other  sort  of  improvements, 
those  which  diminish  labor,  but  without  increasing  the  capacity  of 
the  land  to  produce,  are  such  as  the  improved  construction  of  tools; 
the  introduction  of  new  instruments  which  spare  manual  labor,  as  the 

'  From  John  Stuart  Mill,  Principles  of  PoWcal  Economy,  Book  I,  chap.  xii. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  75 

winnowing  and  threshing  machines;  a  more  skilful  and  economical 
application  of  muscular  exertion,  such  as  the  introduction,  so  slowly 
accomplished  in  England,  of  Scotch  ploughing,  with  two  horses 
abreast  and  one  man,  instead  of  three  or  four  horses  in  a  team  and 
two  men,  etc.  These  improvements  do  not  add  to  the  productive- 
ness of  the  land,  but  they  are  equally  calculated  with  the  former  to 
counteract  the  tendency  in  the  cost  of  production  of  agricultural 
produce,  to  rise  with  the  progress  of  population  and  demand. 

Analogous  in  effect  to  this  second  class  of  agricultural  improve- 
ments, are  improved  means  of  communication.  Good  roads  are 
equivalent  to  good  tools.  It  is  of  no  consequence  whether  the 
economy  of  labor  takes  place  in  extracting  the  produce  from  the  soil, 
or  in  conveying  it  to  the  place  where  it  is  to  be  consumed.  Not  to 
say  in  addition,  that  the  labor  of  cultivation  itself  is  diminished  by 
whatever  lessens  the  cost  of  bringing  manure  from  a  distance,  or  facili- 
tates the  many  operations  of  transport  from  place  to  place  which 
occur  within  the  bounds  of  the  farm.  Railways  and  canals  are 
virtually  a  diminution  of  the  cost  of  production  of  all  things  sent  to 
market  by  them;  and  literally  so  of  all  those,  the  appliances  and  aids 
for  producing  which,  they  serve  to  transmit.  By  their  means  land 
can  be  cultivated  which  would  not  otherwise  have  remunerated  the 
cultivators  without  a  rise  of  price.  Improvements  in  navigation  have, 
with  respect  to  food  or  materials  brought  from  beyond  sea,  a  corre- 
sponding effect. 

From  similar  considerations,  it  appears  that  many  purely  mechan- 
ical improvements,  which  have,  apparently  at  least,  no  peculiar  con- 
nection with  agriculture,  nevertheless  enable  a  given  amount  of  food 
to  be  obtained  with  a  smaller  expenditure  of  labor.  A  great  im- 
provement in  the  process  of  melting  iron,  would  tend  to  cheapen 
agricultural  implements,  diminish  the  cost  of  railroads,  of  wagons 
and  carts,  ships,  and  perhaps  buildings,  and  many  other  things 
to  which  iron  is  not  at  present  appUed,  because  it  is  too  costly; 
and  would  thence  diminish  the  cost  of  production  of  food.  The  same 
effect  would  follow  from  an  improvement  in  those  processes  of  what 
may  be  termed  manufacture,  to  which  the  material  of  food  is  sub- 
jected after  it  is  separated  from  the  groimd.  The  first  application  of 
wind  or  water  power  to  grind  corn,  tended  to  cheapen  bread  as  much 
as  a  very  important  discovery  in  agriculture  would  have  done;  and 
any  great  improvement  in  the  construction  of  corn-mills,  would  have, 
in  proportion,  a  similar  influence.    The  effects  of  cheapening  loco- 


76  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

motion  have  been  already  considered.  There  are  also  engineering 
inventions  which  facilitate  all  great  operations  on  the  earth's  surface. 
An  improvement  in  the  art  of  taking  le\'els  is  of  importance  to  drain- 
ing, not  to  mention  canal  and  railway  making.  The  fens  of  Holland, 
and  of  some  parts  of  England,  are  drained  by  pumps  worked  by  the 
wind  or  by  steam.  Where  canals  of  irrigation,  or  where  tanks  or 
embankments  are  necessary,  mechanical  skill  is  a  great  resource  for 
cheapening  production. 

There  is,  thus,  no  possible  improvement  in  the  arts  of  production 
which  does  not  in  one  or  another  mode  exercise  an  antagonistic 
influence  to  the  law  of  diminishing  return  to  agricultural  labor.  Nor 
is  it  only  industrial  improvements  which  have  this  effect.  Improve- 
ments in  government,  and  almost  every  kind  of  moral  and  social 
advancement,  operate  in  the  same  manner.  Suppose  a  country  in 
the  condition  of  France  before  the  Revolution:  taxation  imposed 
almost  exclusively  on  the  industrious  classes,  and  on  such  a  principle 
as  to  be  an  actual  penalty  on  production;  and  no  redress  obtainable 
for  any  injury  to  property  or  person,  when  inflicted  by  people  of  rank 
or  court  influence.  Was  not  the  hurricane  which  swept  away  this 
system  of  things,  even  if  we  look  no  further  than  to  its  effect  in  aug- 
menting the  productiveness  of  labor,  equivalent  to  many  industrial 
inventions  ?  The  removal  of  a  fiscal  burthen  on  agriculture,  such  as 
tithe,  has  the  same  effect  as  if  the  labor  necessary  for  obtaining  the 
existing  produce  were  suddenly  reduced  one-tenth.  The  abolition 
of  corn  laws,  or  of  any  other  restrictions  which  prevent  commodities 
from  being  produced  where  the  cost  of  their  production  is  lowest, 
amounts  to  a  vast  improvement  in  production.  When  fertile  land, 
previously  reserved  as  hunting  ground,  or  for  any  other  purpose  of 
amusement,  is  set  free  for  culture,  the  aggregate  productiveness 
of  agricultural  industry  is  increased.  It  is  well  known  what  has 
been  the  effect  in  England  of  badly  administered  poor  laws,  and  the 
still  worse  effect  in  Ireland  of  a  bad  system  of  tenancy,  in  rendering 
agricultural  labor  slack  and  ineffective.  No  improvements  operate 
more  directly  upon  the  productiveness  of  labor  than  those  in  the  tenure 
of  farms,  and  in  the  laws  relating  to  landed  property.  The  breaking 
up  of  entails,  the  cheapening  of  the  transfer  of  property,  and  whatever 
else  promotes  the  natufal  tendency  of  land  in  a  system  of  freedom,  to 
pass  out  of  hands  which  can  make  little  of  it  into  those  which  can 
make  more;  the  substitution  of  long  leases  for  tenancy  at  will,  and  of 
any  tolerable  system  of  tenancy  whatever  for  the  wretched  cottier 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  77 

system;  above  all,  the  acquisition  of  a  permanent  interest  in  the  soil 
by  the  cultivators  of  it;  all  these  things  are  as  real,  and  some  of  them 
as  great,  improvements  in  production,  as  the  invention  of  the  spinning 
jenny  or  the  steam  engine. 

We  may  say  the  same  of  improvement  in  education.  The  intelli- 
gence of  the  workman  is  a  most  important  element  in  the  productive- 
ness of  labor.  So  low,  in  some  of  the  most  civiHzed  countries,  is  the 
present  standard  of  intelligence,  that  there  is  hardly  any  source  from 
which  a  more  indefinite  amount  of  improvement  may  be  looked  for  in 
productive  power,  than  by  endowing  with  brains  those  who  now  have 
only  hands.  The  carefulness,  economy,  and  general  trustworthiness 
of  laborers  are  as  important  as  their  intelligence.  Friendly  relations, 
and  a  community  of  interest  and  feeling  between  laborers  and  employ- 
ers, are  eminently  so:  I  should  rather  say,  would  be;  for  I  know  not 
where  any  such  sentiment  of  friendly  alliance  now  exists.  Nor  is  it 
only  in  the  laboring  class  that  improvement  of  mind  and  character 
operates  with  beneficial  effect  even  on  industry.  In  the  rich  and  idle 
classes,  increased  mental  energy,  more  solid  instruction,  and  stronger 
feelings  of  conscience,  public  spirit,  or  philanthropy,  would  quahfy 
them  to  originate  and  promote  the  most  valuable  improvements, 
both  in  the  economical  resources  of  their  country,  and  in  its  institu- 
tions and  customs.  To  look  no  further  than  the  most  obvious 
phenomena,  the  backwardness  of  French  agriculture  in  the  precise 
points  in  which  benefit  might  be  expected  from  the  influence  of  an 
educated  class,  is  partly  accounted  for  by  the  exclusive  devotion  of 
the  richer  landed  proprietors  to  town  interests  and  town  pleasures. 
There  is  scarcely  any  possible  amelioration  of  human  affairs  which 
would  not,  among  its  other  benefits,  have  a  favorable  operation, 
direct  or  indirect,  upon  the  productiveness  of  industry.  The  intensity 
of  devotion  to  industrial  occupations  would  indeed  in  many  cases  be 
moderated  by  a  more  liberal  and  genial  mental  culture,  but  the  labor 
actually  bestowed  on  those  occupations  would  almost  always  be 
rendered  more  effective. 

22.  NATURAL  RESOURCES  OF  THE  UNITED  STATES,  AND 
THEIR  CONSERVATION' 

In  the  growth  of  the  country  and  the  gradual  development  of  its 
natural  resources  there  have  been  three  noteworthy  stages.    The  first 

'Compiled  from  the  Report  of  the  National  Conservation  Commission  (1909). 


7^  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Stage  was  that  of  individual  enterprise  for  personal  and  family  bene- 
fit.    It  led  to  the  conquest  of  the  wilderness. 

The  next  stage  was  that  of  collective  enterprise,  either  for  the 
benefit  of  communities  or  for  the  profit  of  individuals  forming  the 
communities.  It  led  to  the  development  of  cities  and  states,  and  too 
often  to  the  growth  of  great  monopolies. 

The  third  stage  is  the  one  we  are  now  entering.  Within  it  the 
enterprise  is  collective  and  largely  co-operative,  and  should  be  directed 
toward  the  larger  benefit  of  communities,  states,  and  the  people 
generally. 

In  the  first  stage,  the  resources  received  little  thought.  In  the 
second,  they  were  wastefully  used.  In  the  stage  which  we  are  enter- 
ing, wise  and  beneficial  uses  are  essential,  and  the  checking  of  waste 
is  absolutely  demanded. 

The  wastes  which  most  urgently  require  checking  vary  widely  in 
character  and  amount.  The  most  reprehensible  waste  is  that  of  de- 
struction, as  in  forest  fires,  uncontrolled  flow  of  gas  and  oil,  soil 
wash,  and  abandonment  of  coal  in  the  mines.  This  is  attributable, 
for  the  most  part,  to  ignorance,  indifference,  or  false  notions  of 
economy,  to  rectify  which  is  the  business  of  the  people  collectively. 

Nearly  as  reprehensible  is  the  waste  arising  from  misuse,  as  in  the 
consumption  of  fuel  in  furnaces  and  engines  of  low  eflSciency,  the 
loss  of  water  in  floods,  the  employment  of  ill-adapted  structural 
materials,  the  growing  of  ill-chosen  crops,  and  the  perpetuation  of 
inferior  stocks  of  plants  and  animals,  all  of  which  may  be  remedied. 

Reprehensible  in  less  degree  is  the  waste  arising  from  nonuse. 
Since  the  utilization  of  any  one  resource  is  necessarily  progressive 
and  dependent  on  social  and  industrial  conditions  and  the  concurrent 
development  of  other  resources,  nonuse  is  sometimes  unavoidable.  It 
becomes  reprehensible  when  it  affects  the  common  welfare  and  entails 
future  injury.    Then,  it  should  be  rectified  in  the  general  interest. 

For  the  prevention  of  waste  the  most  effective  means  will  be  found 
in  the  increase  and  diffusion  of  knowledge,  from  which  is  sure  to 
result  an  aroused  public  sentiment  demanding  prevention.  The 
people  have  the  matter  in  their  own  hands.  They  may  prevent  or 
limit  the  destruction  of  resources  and  restrain  misuse  through  the 
enactment  and  enforcement  of  appropriate  state  and  federal  laws. 

Wastes  reduced  and  resources  saved  are  the  first  but  not  the  last 
object  of  conservation.     The  material  resources  have  an  additional 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  79 

value  when  their  preservation  adds  to  the  beauty  and  habitability  of 
the  land.  Ours  is  a  pleasant  land  in  which  to  dwell.  To  increase 
its  beauty  and  augment  its  fitness  cannot  but  multiply  our  pleasure 
in  it  and  strengthen  the  bonds  of  our  attachment. 

MINERALS 

The  mineral  production  of  the  United  States  for  1907  exceeded 
$2,000,000,000,  and  contributed  65  per  cent  of  the  total  freight  traffic 
of  the  country.  The  waste  in  the  extraction  and  treatment  of  min- 
eral products  during  the  same  year  was  equivalent  to  more  than 
$300,000,000. 

The  production  for  1907  included  395,000,000  tons  of  bituminous 
and  85,000,000  tons  of  anthracite  coal,  166,000,000  barrels  of  petro- 
leum, 52,000,000  tons  of  iron  ore,  2,500,000  tons  of  phosphate  rock, 
and  869,000,000  pounds  of  copper.  The  values  of  other  mineral 
products  during  the  same  year  included  clay  products,  $162,000,000; 
stone,  $71,000,000;  cement,  $56,000,000;  natural  gas,  $53,000,000; 
gold,  $90,000,000;  silver,  $37,000,000;  lead,  $39,000,000,  and  zinc 
$26,000,000. 

The  available  and  easily  accessible  supplies  of  coal  in  the  United 
States  aggregate,  approximately,  1,400,000,000,000  tons.  At  the 
present  increasing  rate  of  production  this  supply  will  be  so 
depleted  as  to  approach  exhaustion  before  the  middle  of  the  next 
sentury. 

The  coal  fields  are  divided,  for  the  sake  of  convenience  in  classi- 
fication, into  six  main  provinces,  as  follows: 

1.  The  eastern  province,  containing  the  anthracite  coal  fields  of 
Pennsylvania  and  the  bituminous  coal  fields  of  the  Appalachian 
region,  i.e.,  those  of  western  Pennsylvania,  Ohio,  Virginia,  West 
Virginia,  Kentucky,  Tennessee,  Georgia,  Alabama,  and  small  out- 
lying areas  in  North  Carolina. 

2.  The  interior  province,  containing  the  bituminous  coal- 
producing  regions  of  Michigan,  Illinois,  Indiana,  western  Kentucky, 
Iowa,  Kansas,  Missouri,  Oklahoma,  Arkansas,  and  Texas. 

3.  The  Gulf  province,  containing  the  lignite  areas  of  Alabama, 
Mississippi,  Louisiana,  Arkansas,  and  Texas. 

4.  The  northern  Great  Plains  province,  containing  the  lignite 
subbituminous  areas  of  North  and  South  Dakota,  eastern  Montana 
and  northeastern  Wyoming. 


So 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


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Colorado,  Utah,  and  New  Mexico. 


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NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


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82  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

rate  of  consumption  cannot  be  expected  to  last  beyond  the  middle  of 
the  present  century.  In  addition  to  this,  there  are  assumed  to  be 
75,116,070,000  tons  of  lower  grade  iron  ores  which  are  not  available 
for  use  under  existing  conditions. 

The  supply  of  stone,  clay,  cement,  lime,  sand,  and  salt  is  ample, 
while  the  stock  of  the  precious  metals  and  of  copper,  lead,  zinc, 
sulphur,  asphalt,  graphite,  quicksilver,  mica,  and  the  rare  metals 
cannot  well  be  estimated,  but  is  clearly  exhaustible  within  one  to 
three  centuries  unless  unexpected  deposits  be  found. 

The  known  supply'  of  petroleum  is  estimated  at  15,000,000,000  to 
20,000,000,000  barrels,  distributed  through  six  separate  fields  having 
an  aggregate  area  of  8,900  square  miles.  The  production  is  rapidly 
increasing,  while  the  wastes  and  the  loss  through  misuse  are  enor- 
mous. The  supply  cannot  be  expected  to  last  beyond  the  middle  of 
the  present  century. 

The  known  natural-gas  fields  aggregate  an  area  of  9,000  square 
miles,  distributed  through  22  states.  Of  the  total  yield  from  these 
fields  during  1907,  400,000,000,000  cubic  feet,  valued  at  $62,000,000, 
were  utilized,  while  an  equal  quantity  was  allowed  to  escape  into  the 
air.  The  daily  waste  of  natural  gas — the  most  perfect  known  fuel 
— is  over  1,000,000,000  cubic  feet,  or  enough  to  supply  every  city  in 
the  United  States  of  over  100,000  population. 

Phosphate  rock,  used  for  fertilizer,  represents  the  slow  accumula- 
tion of  organic  matter  during  past  ages.  In  most  countries  it  is 
scrupulously  preserved;    in  this  country  it  is  extensively  exported, 

'The  petroleum  fields  of  the  United  States  are:  (i)  the  Appalachian  field, 
extending  from  western  New  York  to  Tennessee;  (2)  the  Lima-Indiana  field  in 
northwestern  Ohio  and  eastern  Indiana;  (3)  the  Illinois  field,  near  the  eastern 
edge  of  the  state;  (4)  the  mid-continent  field,  comprising  the  pools  in  Kansas, 
Oklahoma,  northwestern  Louisiana,  and  northern  Texas;  (5)  the  Gulf  field,  lying 
mainly  in  Texas  and  Louisiana,  and  (6)  the  California  field.  These  great  fields 
control  the  industry.  West  of  the  mid-continent  field  and  east  of  the  California 
field  are  several  smaller  ones  (as  thus  far  developed)  in  Colorado  and  Wyoming, 
with  promises  of  fields  in  New  Mexico,  Utah,  Idaho,  Montana,  Oregon,  and 
Washington.  In  Alaska  at  least  two  petroleum  pools  have  been  discovered  which 
may  possibly  be  capable  of  considerable  output  when  the  market  conditions 
become  favorable. 

There  are  many  regions  in  the  United  States  where  there  is  no  geological 
improbability  of  findmg  pctmicuni.  Such  geological  improbability  exists  where 
the  rocks  are  greatly  disturbed  and  broken  up  to  such  a  depth  as  to  prevent 
probable  drilling  to  the  undisturbed  sedimentary  rocks  which  could  furnish 
good  storage  for  petroleum. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


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NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  8$ 

and  largely  for  this  reason  its  production  is  increasing  rapidly.  The 
original  supply  cannot  long  withstand  the  increasing  demand. 

The  consumption  of  nearly  all  our  mineral  products  is  increasing 
far  more  rapidly  than  our  population.  In  many  cases  the  waste  is 
increasing  more  rapidly  than  the  number  of  our  people.  In  1776 
but  a  few  dozen  pounds  of  iron  were  in  use  by  the  average  family; 
now  our  annual  consumption  of  high-grade  ore  is  over  1,200  pounds 
per  capita.  In  181 2  no  coal  was  used;  now  the  consumption  is  over 
5  tons  and  the  waste  nearly  3  tons  per  capita. 

While  the  production  of  coal  is  increasing  enormously,  the  waste 
and  loss  in  mining  are  diminishing.  At  the  beginning  of  our  mineral 
development  the  coal  abandoned  in  the  mine  was  two  or  three  times 
the  amount  taken  out  and  used.  Now  the  mine  waste  averages  little 
more  than  half  the  amount  saved.  The  chief  waste  is  in  imperfect 
combustion  in  furnaces  and  fire  boxes.  Steam  engines  utilize  on  the 
average  about  8  per  cent  of  the  thermal  energy  of  the  coal.  Internal- 
combustion  engines  utilize  less  than  20  per  cent,  and  in  electric  light- 
ing far  less  than  i  per  cent  of  the  thermal  energy  is  rendered  available. 

With  increasing  industries  new  mineral  resources  become  available 
from  time  to  time.  Some  lignites  and  other  low-grade  coals  are 
readily  gasified  and,  through  the  development  of  internal-combustion 
engines,  may  be  made  to  check  the  consumption  of  high-grade  coals. 

Peat  is  becoming  important;  it  is  estimated  that  14,000,000,000 
tons  are  available  in  the  United  States.  Its  value  is  enhanced  because 
of  distribution  through  states  generally  remote  from  the  fields  of 
coal,  oil,  and  natural  gas. 

The  uses  of  all  our  mineral  resources  are  interdependent.  This  is 
especially  true  of  coal  and  iron,  of  which  neither  can  be  produced  or 
used  without  aid  from  the  other,  and  in  the  production  or  reduction 
of  all  other  minerals  both  coal  and  iron  are  employed.  The  same 
standard  minerals  are  necessary  to  the  development  of  power,  of 
which  the  use  is  increasing  more  rapidly  than  that  of  any  other  com- 
modity. 

The  building  operations  of  the  country  now  aggregate  about 
$1 ,000,000,000  per  year.  The  direct  and  indirect  losses  from  fire  in  the 
United  States  during  1907  approximated  $450,000,000,  or  one-half  the 
cost  of  construction.  Of  this  loss  four-fifths,  or  an  average  of 
$1,000,000  per  day,  could  be  prevented,  as  shown  by  comparison  with 
the  standards  of  construction  and  fire  losses  in  the  larger  European 
countries. 


86  MATER1/VI.S  FOR  ELEiMENTARY  ECONOMICS 

So  far  as  the  ores  are  taken  from  the  mines  and  reduced  to  metals, 
these  resources  are  capitalized;  but  after  thus  being  changed  to  a 
more  valuable  form  they  should  be  so  used  as  to  reduce  to  a  minimum 
the  loss  by  rust,  electrolytic  action,  and  other  wastes. 

There  is  urgent  need  for  greater  safety  to  the  miner.  The  loss  of 
life  through  mine  accidents  is  appalling,  and  preventive  measures 
cannot  be  taken  too  soon. 

The  national  government  should  exercise  such  control  of  the  min- 
eral fuels  and  phosphate  rocks  now  in  its  possession  as  to  check  waste 
and  prolong  our  supply. 

While  the  distribution  and  quantity  of  most  of  our  important  min- 
eral substances  are  known  in  a  general  way,  there  is  imperative  need 
for  further  surveys  and  investigations  and  for  researches  concerning 
the  less-known  minerals. 

LANDS 

The  total  land  area  of  continental  United  States  is  1,920,000,000 
acres.  Of  tliis  but  little  more  than  two-fifths  is  in  farms,  and  less 
than  one-half  of  the  farm  area  is  improved  and  made  a  source  of  crop 
production.  We  have  nearly  6,000,000  farms;  they  average  146  acres 
each.  The  value  of  the  farms  is  nearly  one-fourth  the  wealth  of  the 
United  States.  There  are  more  than  300,000,000  acres  of  public  graz- 
ing land.  The  number  of  persons  engaged  in  agricultural  pursuits 
is  more  than  10,000,000. 

We  grow  one-fifth  of  the  world's  wheat  crop,  three-fifths  of  its 
cotton  crop,  and  four-fifths  of  its  corn  crop.  We  plant  nearly  50,000,- 
000  acres  of  wheat  annually,  with  an  average  yield  of  about  14 
bushels  per  acre;  100,000,000  acres  of  corn,  yielding  an  average  ot 
25  bushels  per  acre;  and  30,000,000  acres  of  cotton,  yielding  about 
12,000,000  bales. 

We  had  on  January  i,  1908,  71,000,000  cattle,  worth  $1,250,000,- 
000;  54,000,000  sheep,  worth  $211,000,000;  and  56,000,000  swine, 
worth  $339,000,000.  The  census  of  1900  showed  $137,000,000  worth 
of  poultry  in  this  country,  which  produced  in  1899,  293,000,000 
dozen  eggs. 

There  has  been  a  slight  increase  in  the  average  yield  of  our  great 
staple  farm  products,  but  neither  the  increase  in  acreage  nor  the 
peld  per  acre  has  kept  pace  with  our  increase  in  population .  Within 
a  century  we  shall  probably  have  to  feed  three  times  as  many  people 
as  now;  and  the  main  bulk  of  our  food  supply  must  be  grown  on 
our  own  soil. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


87 


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88  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  area  of  cultivated  land  may  possibly  be  doubled.  In  addition 
to  the  land  awaiting  the  plow,  75,000,000  acres  of  swamp  land  can  be 
reclaimed,  40,000,000  acres  of  desert  land  irrigated,  and  millions  ol 
acres  of  brush  and  wooded  land  cleared.  Our  population  will  in- 
crease continuously,  but  there  is  a  definite  limit  to  the  increase  oi 
our  cultivated  acreage.  Hence  we  must  greatly  increase  the  yield  per 
acre.  The  average  yield  of  wheat  in  the  United  States  is  less  than 
14  bushels  per  acre,  in  Gecmany  28  bushels,  and  in  England  32 
bushels.  We  get  30  bushels  of  oats  per  acre,  England  nearly  45, 
and  Germany  more  than  47.  Our  soils  are  fertile,  but  our  mode  of 
farming  neither  conserves  the  soil  nor  secures  full  crop  returns.  Soil 
fertility  need  not  be  diminished,  but  may  be  increased.  The  large 
yields  now  obtained  from  farms  in  Europe  which  have  been  cultivated 
for  a  thousand  years  prove  this  conclusively.  Proper  management 
will  double  our  average  yield  per  acre.  The  United  States  can  grow 
the  farm  products  needed  by  a  population  more  than  three  times 
as  great  as  our  country  now  contains. 

The  greatest  unnecessary  loss  of  our  soil  is  preventable  erosion. 
Second  only  to  this  is  the  waste,  nonuse,  and  misuse  of  fertilizer 
derived  from  animals  and  men. 

The  losses  to  farm  products  due  to  injurious  mammals  is  estimated 
at  $130,000,000  annually;  the  loss  through  plant  diseases  reaches 
several  hundred  million  dollars;  and  the  loss  through  insects  is  reck- 
oned at  $659,000,000.  The  damage  by  birds  is  balanced  by  their 
beneficent  work  in  destroying  noxious  insects.  Losses  due  to  the 
elements  are  large,  but  no  estimate  has  been  made  of  them.  Losses 
to  live  stock  from  these  causes  are  diminishing  because  of  protection 
and  feeding  during  winter.  The  annual  losses  from  disease  among 
domestic  animals  are:  Horses,  i .  8  per  cent;  cattle,  2  per  cent;  sheep, 
2 . 2  per  cent,  and  swine,  5 .  i  per  cent.  Most  of  these  farm  losses  are 
preventable. 

There  is  a  tendency  toward  consolidation  of  farm  lands.  The  esti- 
mated area  of  abandoned  farms  is  16,000  square  miles,  or  about  3 
per  cent  of  the  improved  land.  The  causes  of  abandonment  differ 
in  different  parts  of  the  country.  Where  most  prevalent,  it  is  caused 
principally  by  erosion  and  exhaustion  of  the  soil. 

The  product  of  the  fisheries  of  the  United  States  has  an  annual 
value  of  $57,000,000.  Fish  culture  is  carried  on  by  the  nation  and 
the  states  on  an  enormous  scale.  Most  of  the  more  important  food 
species  are  propagated,  and  several  species  are  maintained  in  that 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


89 


way.    Fish  from  forest  waters  furnish  $21,000,000  worth  of  food 
yearly,  a  supply  dependent  on  the  preservation  of  the  forests. 


PERCENTAGE  OF  IMPROVED  LAND  TO  TOTAL  AREA. 

10  20  30  40  50  60  70  80^ 


IOWA 

ILLINOIS 

OHIO 

INDIANA 

DELAWARE 

MARYLAND 

KENTUCKY 

MISSOURI 

NEW  YORK 

KANSAS 

PENNSYLVANIA 

NEW  JERSEY 

VIRGINIA 

TENNESSEE 

NEBRASKA 

VERMONT 

WEST  VIRGINIA 

MINNESOTA 

CONNECTICUT 

MICHIGAN 

WISCONSIN 

SOUTH  CAROLINA 

GEORGIA 

RHODE  ISLAND 

NORTH  CAROLINA 

ALABAMA 

MISSISSIPPI 

MASSACHUSETTS 

SOUTH   DAKOTA 

NORTH  DAKOTA 

ARKANSAS 

OKLAHOMA 

NEW  HAMPSHIRE 

LOUISIANA 

DIST.  OF  COLUMBIA 

CALIFORNIA 

TEXAS 

WASHINGTON 

OREGON 

FLORIDA 

COLORADO 

IDAHO 

UTAH 

MONTANA 

WYOMING 
NEVADA 
NEW  MEXICO 
ARIZONA 


Our  wdld  game  and  fur-bearing  animals  have  been  largely  ex- 
terminated.   To  prevent  their  complete  extinction  the  states  and  th^ 


90  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

United  States  have  taken  in  hand  their  protection,  and  their  numbers 
are  now  increasing.  Forest  game  yields  over  $10,000,000  worth  of 
food  each  year. 

With  game  birds  the  story  is  much  the  same — wanton  destructions 
until  the  number  has  been  greatly  reduced,  followed  in  recent  years 
by  wise  protection,  which  in  some  cases  allows  the  remnant  to  survive 
and  even  to  increase. 

Each  citizen  of  the  United  States  owns  an  equal  undivided  interest 
in  about  387,000,000  acres  of  public  lands,  exclusive  of  Alaska  and 
the  insular  possessions.  Besides  this  there  are  about  235,000,000 
acres  of  national  forests,  national  parks,  and  other  lands  devoted  to 
public  use. 

Good  business  sense  demands  that  a  definite  land  policy  be  formu- 
lated. The  National  Conservation  Commission  believes  that  the  fol- 
lowing will  serve  as  a  basis  therefor: 

1.  Every  part  of  the  public  lands  should  be  devoted  to  the  use 
which  will  best  subserve  the  interests  of  the  whole  people. 

2.  The  classification  of  all  public  lands  is  necessary  for  their  ad- 
ministration in  the  interests  of  the  people. 

3.  The  timber,  the  minerals,  and  the  surface  of  the  public  lands 
should  be  disposed  of  separately. 

4.  Public  lands  more  valuable  for  conserving  water  supply,  timber, 
and  natural  beauties  or  wonders  than  for  agriculture  should  be  held 
for  the  use  of  the  people  from  all  except  mineral  entry. 

5.  Title  to  the  surface  of  the  remaining  nonmineral  public  lands 
should  be  granted  only  to  actual  home  makers. 

6.  Pending  the  transfer  of  title  to  the  remaining  public  lands  they 
should  be  administered  by  the  government  and  their  use  should  be 
allowed  in  a  way  to  prevent  or  control  waste  and  monopoly. 

The  present  public-land  laws  as  a  whole  do  not  subserve  the  best 
interests  of  the  nation.  They  should  be  modified  so  far  as  may  be 
required  to  bring  them  into  conformity  with  the  foregoing  outline  of 
policy. 

FORESTS 

Next  to  our  need  of  food  and  water  comes  our  need  of  timber. 

Our  industries  which  subsist  wholly  or  mainly  upon  wood  pay  the 
wages  of  more  than  1,500,000  men  and  women. 

Forests  not  only  grow  timber,  but  they  hold  the  soil  and  they  con- 
serve the  streams.    They  abate  the  wind  and  give  protection  from 


NATURAL  RESOURCES  AS  ECONOJMIC  FACTORS 


91 


92  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

excessive  heat  and  cold.  Woodlands  make  for  the  fiber,  health,  and 
happiness  of  the  citizen  and  the  nation. 

Our  forests  now  cover  550,000,000  acres,  or  about  one-fourth  of  the 
United  States.  The  original  forests  covered  not  less  than  850,000,000 
acres. 

Forests  publicly  owned  contain  one-fifth  of  all  our  standing  timber. 
Forests  privately  owned  contain  four-fifths  of  the  standing  timber. 
The  timber  privately  owned  is  not  only  four  times  that  publicly 
owned,  but  is  generally  more  valuable. 

Forestry  is  now  practiced  on  70  per  cent  of  the  forests  publicly 
owned  and  on  less  than  i  per  cent  of  the  forests  privately  owned,  or 
on  only  18  per  cent  of  the  total  area  of  forests. 

The  yearly  growth  of  wood  in  our  forests  does  not  average  more 
than  12  cubic  feet  per  acre.  This  gives  a  total  yearly  growth  of  less 
than  7,000,000,000  cubic  feet. 

We  have  200,000,000  acres  of  mature  forests,  in  which  yearly 
growth  is  balanced  by  decay;  250,000,000  acres  partly  cut  over  or 
burned  over,  but  restocking  naturally  with  enough  young  growth  to 
produce  a  merchantable  crop,  and  100,000,000  acres  cut  over  and 
burned  over,  upon  which  young  growth  is  lacking  or  too  scanty  to 
make  merchantable  timber. 

We  take  from  our  forests  yearly,  including  waste  in  logging  and  in 
manufacture,  23,000,000,000  cubic  feet  of  wood.  We  use  each  year 
100,000,000  cords  of  firewood;  40,000,000,000  feet  of  lumber;  more 
than  1,000,000,000  posts,  poles,  and  fence  rails;  1 18,000,000  hewn  ties; 
1,500,000,000  staves;  over  133,000,000  sets  of  heading;  nearly  500,- 
000,000  barrel  hoops;  3,000,000  cords  of  native  pulp  wood;  165,000,- 
000  cubic  feet  of  round  mine  timbers,  and  1,250,000  cords  of  wood  for 
distillation. 

Since  1870  forest  fires  have  destroyed  a  yearly  average  of  50  lives 
and  $50,000,000  worth  of  timber.  Not  less  than  50,000,000  acres  of 
forest  is  burned  over  yearly.  The  young  growth  destroyed  by  fire  is 
worth  far  more  than  the  merchantable  timber  burned. 

One-fourth  of  the  standing  timber  is  lost  in  logging.  The  boxing 
of  long-leaf  pine  for  turpentine  has  destroyed  one-fifth  of  the  forests 
worked.  The  loss  in  the  mill  is  from  one-third  to  two-thirds  of  the 
timber  sawed.  The  loss  of  mill  product  in  seasoning  and  fitting  for 
use  is  from  one-seventh  to  one-fourth. 

Of  each  1,000  feet  which  stood  in  the  forest,  an  average  of  only 
320  feet  of  lumber  is  used. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


93 


We  take  from  our  forests  each  year,  not  counting  the  loss  by  fire, 
three  and  a  half  times  their  yearly  growth.  We  take  40  cubic  feet 
per  acre  for  each  12  cubic  feet  grown;  we  take  260  cubic  feet  per 
capita,  while  Germany  uses  37  and  France  25  cubic  feet. 

We  tax  our  forests  under  the  general  property  tax,  a  method  aban- 
doned long  ago  by  every  other  great  nation.  Present  tax  laws  pre- 
vent reforestation  of  cut-over  land  and  the  perpetuation  of  existing 
forests  by  use. 

Great  damage  is  done  to  standing  timber  by  injurious  forest  insects. 
Much  of  this  damage  can  be  prevented  at  small  expense. 

To  protect  our  farms  from  wind  and  to  reforest  land  best  suited 
for  forest  growth  will  require  tree  planting  on  an  area  larger  than 


RELATIVE  LUMBER   PRODUCTION 
IN  TEN  STATES  IN  laflO  AND  1907 


L0« 


CTION 
1907 

1307 

4.511 

BILLIONS  BOARD  FEET 

0    5     10   IS  20  Z5  30  35  40 

4.3% 

6.0T. 

■ 
2.1% 

5.5V. 

4.9% 

1850 
I860 
1870 
1880 
1900 
1907 

■ 

1 

■ 

^ 

■ 

9.4-* 

■MHB 

■H 

m 

H 

IBhi 

3.2V 

7.4-X 
4.1V. 

Pennsylvania,  Ohio,  and  West  Virginia  combined.  Lands  so  far  suc- 
cessfully planted  make  a  total  area  smaller  than  Rhode  Island;  and 
year  by  year,  through  careless  cutting  and  fires,  we  lower  the  capacity 
of  existing  forests  to  produce  their  like  again,  or  else  totally  destroy 
them. 

In  spite  of  substitutes  we  shall  always  need  much  wood.  So  far 
our  use  of  it  has  steadily  increased.  The  condition  of  the  world's 
supply  of  timber  makes  us  already  dependent  upon  what  we  produce. 
We  send  out  of  our  country  one  and  a  half  times  as  much  timber  as 
we  bring  in.  Except  for  finishing  woods,  relatively  small  in  amount, 
we  must  grow  our  own  supply  or  go  without.  Until  we  pay  for  our 
lumber  what  it  costs  to  grow  it,  as  well  as  what  it  costs  to  log  and 
saw,  the  price  will  continue  to  rise. 


94 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


■  The  preservation  by  use,  under  the  methods  of  practical  forestry, 
of  _all  public  forest  lands,  either  in  state  or  federal  ownership,  is 
essential  to  the  permanent  public  welfare.  In  many  forest  states 
the  acquirement  of  additional  forest  lands  as  state  forests  is  neces- 
sary to  the  best  interests  of  the  states  themselves. 

The  conservation  of  our  mountain  forests,  as  in  the  Appalachian 
system,  is  a  national  necessity.  These  forests  are  required  to  aid  in 
the  regulation  of  streams  used  for  navigation  and  other  purposes. 
The  conservation  of  these  forests  is  impracticable  through  private 
enterprise  alone,  by  any  state  alone,  or  by  the  federal  government 


FOREST   PRODUCTS    IN 

1907. 

FOREST  MATERIAL  REQUIRED 

CLASSES 

FIREWOOD 

BILLIONS  or  CUBIC  FE 

5l234B»ro 

in 

0 

LUMBER  AND   SHINGLES 

^ 

^ 

m 

K1 

1 

POLES.  POSTS.  AND    RAILS _... 

■ 

■ 

HEWED  CROSS-TIES 

■ 

I 

COOPERAGE    STOCK _.... 

PULP-WOOD. _ 

1 

ROUND    MINE   TIMBERS 

1 
1 

DISTILLATION   WOOD 

alone.  Eflective  and  immediate  co-operation  between  these  three 
agencies  is  essential.  Federal  ownership  of  limited  protective  areas 
upon  important  watersheds,  effective  state  fire  patrol,  and  the  co- 
operation of  private  forest  owners  are  all  required. 

The  true  remedy  for  unwise  tax  laws  lies  not  in  laxity  in  their 
application  nor  in  special  exemptions,  but  in  a  change  in  the  method 
of  taxation.  An  annual  tax  upon  the  land  itself,  exclusive  of  the 
value  of  the  timber,  and  a  tax  upon  the  timber  when  cut,  is  well 
adapted  to  actual  conditions  of  forest  investment,  and  is  practicable 
and  certain.  It  is  far  better  that  forest  land  should  pay  a  moderate 
tax  permanently  than  that  it  should  pay  an  excessive  revenue  tem- 
porarily and  then  cease  to  pay  at  all. 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS 


95 


Forests  in  private  ownership  cannot  be  conserved  unless  they  are 
protected  from  fire.  We  need  good  fire  laws,  well  enforced.  Fire 
control  is  impossible  without  an  adequate  force  of  men  whose  sole 
duty  is  fire  patrol  during  the  dangerous  season. 

The  conservative  use  of  the  forest  and  of  timber  by  American 
citizens  will  not  be  general  until  they  learn  how  to  practice  forestry. 
Through  a  vigorous  national  campaign  in  education,  forestry  has 
taken  root  in  the  great  body  of  American  citizenship.    The  basis 


SPECIES 
YELLOW  PINE 
DOUGLAS  FIR 
WKITE   PINE 
OAK 

HEMLOCK 
SPRUCE 
WESTERN  PINE 
MAPLE 
POPLAR 
CrpRESS 
RED  GUM 
CHESTNIH' 
REDWOOD 
BEECH 
BIRCH 
BASSWOOD 
COTTONWOOD 
ELM 
ASH 
CEDAR 
LARCH 
HICKOror 
WHITE    riR 
SUOAR  PINE 
TAMARACK 
TUPELO 
SYCAMORE 
WALNUT 
ALL   OTHERS 


LUMBER    CUT   BY   SPECIES    1907, 

BILLIONS   OF    BOARD    FCET. 

12345670  9  10 


12 


14 


^ 

m  — 





■■ 

^1^ 

r 

already  exists  upon  which  to  build  a  structure  of  forest  conservation 
which  vdW  endure.  This  needs  the  definite  commitment  of  state 
governments  and  the  federal  government  to  their  inherent  duty 
of  teaching  the  people  how  to  care  for  their  forests.  The  final  re- 
sponsibility, both  for  investigative  work  in  forestry  and  for  making 
its  results  known,  rests  upon  the  states  and  upon  the  nation. 

By  reasonable  thrift,  we  can  produce  a  constant  timber  supply 
beyond  our  present  need,  and  with  it  conserve  the  usefulness  of  our 
streams  for  irrigation,  water  supply,  navigation,  and  power. 


96  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Under  right  management  our  forests  will  yield  over  four  times  as 
much  as  now.  We  can  reduce  waste  in  the  woods  and  in  the  mill  at 
least  one-third,  with  present  as  well  as  future  profit.  We  can  per- 
petuate the  naval-stores  industry.  Preservative  treatment  will  reduce 
by  one-fifth  the  quantity  of  timber  used  in  the  water  or  in  the  ground. 
We  can  practically  stop  forest  fires  at  a  cost  yearly  of  one-fifth  the 
value  of  the  merchantable  timber  burned. 

We  shall  suffer  for  timber  to  meet  our  needs  until  our  forests  have 
had  time  to  grow  again.  But  if  we  act  vigorously  and  at  once  we 
shall  escape  permanent  timber  scarcity. 

WATERS 

The  sole  source  of  our  fresh  water  is  rainfall,  including  snow. 
From  this  source  all  running,  standing,  and  ground  waters  are 
derived.  The  habitabiHty  of  the  country  depends  on  these  waters. 
Our  mean  annual  rainfall  is  about  30  inches;  the  quantity  about 
215,000,000,000,000  cubic  feet  per  year,  equivalent  to  ten  Mississippi 
rivers. 

Of  the  total  rainfall,  over  half  is  evaporated;  about  a  third  flows 
into  the  sea;  the  remaining  sixth  is  either  consumed  or  absorbed. 
These  portions  are  sometimes  called,  respectively,  the  fly-off,  the 
run-off,  and  the  cut-off.  They  are  partly  interchangeable.  About  a 
third  of  the  run-off,  or  a  tenth  of  the  entire  rainfall,  passes  through 
the  Mississippi.  The  run-off  is  increasing  with  deforestation  and 
cultivation. 

Of  the  70,000,000,000,000  cubic  feet  annually  flowing  into  the  sea, 
less  than  i  per  cent  is  retained  and  utilized  for  municipal  and  com- 
munity supply;  less  than  2  per  cent  (or  some  10  per  cent  of  that  in 
the  arid  and  semi-arid  regions)  is  used  for  irrigation;  perhaps  5  per 
cent  is  used  for  navigation,  and  less  than  5  per  cent  for  power. 

For  municipal  and  community  water  supply  there  are  protected 
catchment  areas  aggregating  over  1,000,000  acres,  and  over  $250,- 
000,000  are  invested  in  waterworks,  with  nearly  as  much  more  in  the 
appurtenant  catchment  areas  and  other  lands.  The  population  so 
supplied  approaches  10,000,000,  and  the  annual  consumption  is  about 
37,500,000,000  cubic  feet.  The  better  managed  systems  protect  the 
catchment  areas  by  forests  and  grass;  the  water  is  controlled  and  the 
storm  product  used,  but  there  is  large  waste  after  the  water  enters 
the  mains. 


NATURi\L  RESOURCES  AS  ECONOMIC  FACTORS 


97 


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9$  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

For  irrigation  it  is  estimated  that  there  are  $200,000,000  invested 
in  dams,  ditches,  reservoirs,  and  other  works  for  the  partial  control 
of  the  waters,  and  that  1,500,000,000,000  cubic  feet  are  annually 
diverted  to  irrigable  lands,  aggregating  some  20,000  square  miles. 
Ex'cept  in  some  cases  through  forestry,  few  catchment  areas  are  con- 
trolled, and  few  reservoirs  are  large  enough  to  hold  the  storm  waters. 
The  waste  in  the  public  and  private  projects  exceeds  60  per  cent, 
,  while  no  more  than  25  per  cent  of  the  water  actually  available  for 
irrigation  of  the  arid  lands  is  restrained  and  diverted. 

There  are  in  continental  United  States  287  streams  navigated  for 
an  aggregate  of  26,226  miles,  and  as  much  more  navigable  if  im- 
proved. There  are  also  45  canals,  aggregating  2,189  miles,  besides 
numerous  abandoned  canals.  Except  through  forestry  in  recent 
years,  together  with  a  few  reservoirs  and  canal  locks  and  movable 
dams,  there  has  been  little  effort  to  control  headwaters  or  catchment 
areas  in  the  interests  of  navigation,  and  none  of  our  rivers  are  navi- 
gated to  more  than  a  small  fraction  even  of  their  effective  low-water 
capacity. 

The  water  power  now  in  use  is  5,250,000  horse-power;  the  amount 
running  over  government  dams  and  not  used  is  about  1,400,000  horse- 
power; the  amount  reasonably  available  equals  or  exceeds  the  entire 
mechanical  power  now  in  use,  or  enough  to  operate  every  mill,  drive 
every  spindle,  propel  every  train  and  boat,  and  light  every  city,  town, 
and  village  in  the  country.  While  the  utilization  of  water-power 
ranks  among  our  most  recent  and  most  rapid  industrial  developments, 
little  effort  has  been  made  to  control  catchment  areas  or  storm  waters 
in  any  large  way  for  power,  though  most  plants  effect  local  control 
through  reservoirs  and  other  works.  Nearly  all  the  freshet  and  flood 
water  runs  to  waste,  and  the  low  waters  which  limit  the  efficiency  of 
power  plants  are  increasing  in  frequency  and  duration  with  the  in- 
creasing flood  run-off. 

The  practical  utility  of  streams  for  both  navigation  and  power  is 
measured  by  the  effective  low-water  stage.  The  volume  carried  when 
the  streams  rise  above  this  stage  is  largely  wasted  and  often  does 
serious  damage.  The  direct  yearly  damage  by  floods  since  1900  has 
increased  steadily  from  $45,000,000  to  over  $238,000,000.  The  indi- 
rect loss  through  depreciation  of  property  is  great,  while  a  large  loss 
arises  in  impeded  traffic  through  navigation  and  terminal  transfers. 

The  freshets  are  attended  by  destructive  soil  erosion.  The  soil 
matter  annually  carried  into  lower  rivers  and  harbors  or  into  the  sea 


NATURiVL  RESOURCES  AS  ECONOMIC  FACTORS 


99 


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lOO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

is  computed  at  783,000,000  tons.  Soil  wash  reduces  by  10  or  20  per 
cent  the  productivity  of  upland  farms  and  increases  channel  cutting 
and  bar  building  in  the  rivers.  The  annual  loss  to  the  farms  alone 
is  fully  $500,000,000,  and  large  losses  follow  the  fouling  of  the  waters 
and  the  diminished  navigability  of  the  streams. 

Through  imperfect  control  of  the  running  waters  lowlands  are  tem- 
porarily or  permanently  flooded.  It  is  estimated  that  there  are  in 
mainland  United  States  about  75,000,000  acres  of  overflow  and  swamp 
lands  requiring  drainage;  that  by  systematic  operation  these  can  be 
drained  at  moderate  expense,  and  that  they  would  then  be  worth  two 
or  three  times  the  present  value  and  cost  of  drainage,  and  would  fur- 
nish homes  for  10,000,000  people. 

It  is  estimated  that  the  quantity  of  fresh  water  stored  in  lakes  and 
ponds  (including  the  American  portion  of  the  Great  Lakes)  is  about 
600,000,000,000,000  cubic  feet,  equivalent  to  three  years'  rainfall  or 
eight  years'  run-off.  Some  6,000,000  of  our  people  draw  their  water 
supply  from  lakes. 

A  large  part  of  that  half  of  the  annual  rainfall  not  evaporated 
lodges  temporarily  in  the  soil  and  earth.  It  is  estimated  that  the 
ground  water  to  the  depth  of  100  feet  averages  i6f  per  cent  of  the 
earth  volume,  or  over  1,400,000,000,000,000  cubic  feet,  equivalent  to 
seven  years'  rainfall  or  twenty  years'  run-off.  This  subsurface  reser- 
voir is  the  essential  basis  of  agriculture  and  other  industries  and  is 
the  chief  natural  resource  of  the  country.  It  sustains  forests  and  all 
other  crops  and  supplies  the  perennial  springs  and  streams  and  wells 
used  by  four-fifths  of  our  population  and  nearly  all  our  domestic 
animals.  Its  quantity  is  diminished  by  the  increased  run-off  due  to 
deforestation  and  injudicious  farming.  Although  the  volume  of  the 
available  ground  water  is  subject  to  control  by  suitable  treatment 
of  the  surface,  little  effort  has  been  made  to  retain  or  increase  it,  and 
it  is  probable  that  fully  10  per  cent  of  this  rich  resource  has  been 
wasted  since  settlement  began.  The  water  of  the  strata  below  100  feet 
suppUes  artesian  and  deep  wells,  large  springs,  and  thermal  and  mineral 
waters.     It  can  be  controlled  only  through  the  subsurface  reservoir. 

Of  the  35,000,000,000,000  cubic  feet  of  cut-off,  the  chief  share  is 
utilized  by  natural  processes  or  by  agriculture  and  related  industries. 
On  an  average  the  plant  tissue  of  annual  growths  is  three-fourths  and 
of  perennial  growths  three-eighths  water;  of  human  and  stock  food 
over  80  per  cent  is  water,  and  in  animal  tissue  the  ratio  is  about  the 
same;    and  since  water  is  the  medium  for  organic  circulation,  the 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  lOl 

plants  and  animals  of  the  country  yearly  require  an  amount  many 
times  exceeding  their  aggregate  volume.  Even  in  the  more  humid 
sections  of  the  country  the  productivity  of  the  soil  and  the  possible 
human  population  would  be  materially  increased  by  a  greater  rain- 
fall, leaving  a  larger  margin  for  organic  and  other  chemical  uses. 
Except  through  agriculture  and  forestry  little  general  effort  is  made 
to  control  the  annual  cut-off,  although  some  farmers  in  arid  regions 
claim  to  double  or  triple  the  crop  from  given  soil  by  supplying  water 
just  when  needed  and  withholding  it  when  not  required. 

Water  is  like  other  resources  in  that  its  quantity  is  limited.  It 
differs  from  such  mineral  resources  as  coal  and  iron,  which  once 
used  are  gone  forever,  in  that  the  supply  is  perpetual;  and  it  differs 
from  such  resources  as  soils  and  forests,  which  are  capable  of  re- 
newal or  improvement,  in  that  it  cannot  be  augmented  in  quantity, 
though  like  all  other  resources  it  can  be  better  utilized. 

The  inventory  of  our  natural  resources  made  by  your  commission 
with  the  vigorous  aid  of  all  federal  agencies  concerned,  of  many 
states,  and  of  a  great  number  of  associated  and  individual  co-op- 
erators, furnishes  a  safe  basis  for  general  conclusions  as  to  what  we 
have,  what  we  use  and  waste,  and  what  may  be  the  possible  saving. 
But  for  none  of  the  great  resources  of  the  farm,  the  mine,  the  forest, 
and  the  stream  do  we  yet  possess  knowledge  definite  or  wide  enough 
to  insure  methods  of  use  which  will  best  conserve  them. 

In  order  to  conserve  a  natural  resource,  we  must  know  what 
that  resource  is  by  taking  stock.  We  greatly  need  a  more  complete 
inventory  of  our  natural  resources;  and  this  cannot  be  made  except 
through  the  active  co-operation  of  the  states  with  the  nation. 

The  permanent  welfare  of  the  nation  demands  that  its  natural 
resources  be  conserved  by  proper  use.  To  this  end  the  states  and  the 
nation  can  do  much  by  legislation  and  example.  By  far  the  greater 
part  of  these  resources  is  in  private  hands.  Private  ownership  of 
natural  resources  is  a  public  trust;  they  should  be  administered  in 
the  interests  of  the  people  as  a  whole.  The  states  and  nation  should 
lead  rather  than  follow  in  the  conservative  and  efl&cient  use  of  prop- 
erty under  their  immediate  control.  But  their  first  duty  is  to  gather 
and  distribute  a  knowledge  of  our  natural  resources  and  of  the  means 
necessary  to  insure  their  use  and  conservation,  to  impress  the  body  of 
the  people  with  the  great  importance  of  the  duty,  and  to  promote  the 
co-operation  of  all.  No  agency,  state,  federal,  corporate,  or  private, 
can  do  the  work  alone. 


I02  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Finally,  the  conservation  of  our  resources  is  an  immediate  and 
vital  concern.  Our  welfare  depends  on  conservation.  The  pressing 
need  is  for  a  general  plan  under  which  citizens,  states,  and  nation 
may  unite  in  an  effort  to  achieve  this  great  end.  The  lack  of  co- 
operation between  the  states  themselves,  between  the  states  and  the 
nation,  and  between  the  agencies  of  the  national  government  is 
a  potent  cause  of  the  neglect  of  conservation  among  the  people.  An 
organization  through  which  all  agencies — state,  national,  municipal, 
associate,  and  individual — may  unite  in  a  common  effort  to  conserve 
the  foundations  of  our  prosperity  is  indispensable  to  the  welfare  and 
progress  of  the  nation.  To  that  end  the  immediate  creation  of  a 
national  agency  is  essential.  Many  states  and  associations  of  citizens 
have  taken  action  by  the  appointment  of  permanent  conservation 
commissions.  It  remains  for  the  nation  to  do  likewise,  in  order  that 
the  states  and  the  nation,  associations  and  individuals,  may  join 
in  the  accomplishment  of  this  great  purpose. 

23.  THE  ECONOMIC  POSSIBILITIES  OF  CONSERVATION' 

The  real  heart  of  the  conservation  problem  presents  an  issue 
which  taxes  the  resources  of  economic  theory  to  the  utmost.  This 
issue  is  the  problem  of  adjusting  the  conflict  between  the  interest  of 
present  and  future.  In  America  the  possibilities  of  conservation  have 
been  considered  largely  from  the  standpoint  of  natural  science,  while 
the  economic  limitations  have  been  but  little  appreciated. 

It  is  first  necessary  to  determine  the  relation  between  the  utiliza- 
tion of  natural  resources  and  their  exhaustion.  If  utilization  did  not 
result  in  exhaustion,  the  problem  of  conservation,  as  it  was  stated 
above,  obviously  would  not  exist.  Accordingly,  natural  resources 
may  be  classified  as  follows: 

I.  Resources  which  exist  in  such  abundance  that  there  is  no  apparent 
necessity  for  economy,  either  in  present  or  future;  for  instance,  water 
in  some  localities. 
II.  Resources  which  will  probably  become  scarce  in  the  remote  future, 
although  so  abundant  as  to  have  no  market  value  in  the  present;  for 
instance,  building  stone  and  sand  in  some  localities. 
III.    Resources  which  have  a  present  scarcity — 

1.  Not  exhaustible  through  normal  use:  water-powers. 

2.  Necessarily   exhausted    through    use,    and    non-restorable    after 
exhaustion:  mineral  deposits. 

'  Adapted  from  L.  C.  Gray,  "The  Economic  Possibilities  of  Conservation"  in 
the  Quarkrly  Journal  0/  Economics,  XXVII,  499-509  (May,  1913). 


NATURAL  RESOURCES  AS  ECONOMIC  FACTORS  103 

3.  Necessarily  exhausted  through  use,  but  restorable:  forests,  fish. 

4.  Exhaustible  in  a  given  locality  but  restorable  through  the 
employment  of  other  resources  of  a  different  kind  or  of  similar 
resources  in  different  locations:  agricultural  land. 

Is  private  property  in  natural  objects  favorable  or  unfavorable  to 
the  realization  of  the  ideals  of  the  conservationist  ?  Whether  or  not 
the  individual  will  pursue  a  policy  of  exploitation  or  one  of  conserva- 
tion, depends  on  a  number  of  conditions,  the  most  important  of  which 
are  the  rate  of  interest,  the  law  of  diminishing  productivity,  and  the 
value  of  the  natural  resources  under  the  individual's  control. 

The  influence  of  the  rate  of  interest  may  be  illustrated  by  the 
motives  which  govern  the  owner  of  a  coal  mine  in  the  utilization  of  his 
property.  Were  it  possible  to  remove  all  of  this  content  in  the  present 
as  cheaply  as  over  a  period  of  time,  the  owner  would  most  certainly  do 
so.  This  is  true  because  the  proceeds  from  the  sale  of  the  product 
may  be  put  out  at  interest,  whereas  the  mineral  yields  no  interest  so 
long  as  it  remains  unsold.  It  is  assumed,  of  course,  that  no  changes 
in  the  price  of  the  product  are  anticipated. 

The  owner  is  prevented,  however,  from  the  immediate  appropria- 
tion of  the  entire  valuable  content  because  the  removal  of  the  product 
is  subject  to  the  law  of  diminishing  productivity.  After  a  certain  rate 
of  removal  is  achieved,  an  increase  in  that  rate  results  in  a  smaller 
return  per  unit  of  expense.  By  postponing  the  extraction  of  this 
additional  coal  until  some  future  period,  the  owner  of  the  mine  can 
remove  the  entire  content  at  a  minimum  expense. 

The  rate  of  extraction  of  the  coal  which  will  be  most  profitable  to 
the  owner  is  necessarily  a  rate  between  the  two  extremes  which  have 
just  been  explained.  If  the  interest  rate  is  high,  the  postponement  of 
removal  until  a  future  period  becomes  less  profitable  than  would  be 
the  case  under  a  lower  rate  of  interest.  The  greater  amount  of 
interest  which  may  be  secured  from  the  realized  product  more  than 
balances  the  loss  from  diminishing  returns  through  an  increase  in  the 
rate  of  present  removal.  Thus  the  general  efifect  of  a  high  interest 
rate,  other  things  being  equal,  is  rapid  exploitation;  whereas  a  lower 
interest  rate  makes  a  policy  of  conservation  more  profitable  to 
the  owner. 

The  market  value  of  the  natural  resource  influences  the  rate  of 
utilization  in  several  ways.  In  the  first  place,  the  rise  of  value 
increases  the  amount  of  land  that  may  be  profitably  utilized.  It 
becomes  profitable  to  farm  new  areas,  to  sink  shafts  in  mineral  deposits 
which  it  would  not  have  been  profitable  to  mine  under  the  lower  level 


I04  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  prices,  and  to  seek  lower  levels  in  the  old  shafts.  In  short,  the 
result  of  the  increase  in  value  is  to  increase  rapidity  of  utilization  by 
stimulating  the  appropriation  of  resources  hitherto  not  subject  to  use, 
thereby  intensifying  the  drain  upon  the  supply  of  natural  resources. 

The  second  result  of  the  increase  in  value  is  to  encourage  a  more 
intensive  utilization  of  the  resources  formerly  employed.  Does  this 
mean  conservation  or  more  rapid  utilization?  There  has  been  a 
widespread  belief  that  an  intensive  use  of  land  is  a  conservative  use 
and  that  high  land  values  will  result  in  a  cessation  of  soil  mining.  In 
general,  however,  a  more  intensive  use  implies  merely  the  association 
of  a  relatively  large  amount  of  labor  and  capital  with  a  given  surface 
of  land.  A  larger  amount  of  labor  and  capital  associated  with  a  given 
surface  may  mean  a  more  rapid  utilization  of  the  content  of  the  land 
than  under  more  extensive  methods.  It  may  mean  deeper  plowmg, 
more  frequent  cultivation;  larger  harvests,  more  rapid  exhaustion. 

There  are  seyeral  reasons,  however,  which  justify  the  view  that 
utilization  will  tend  to  be  exploitative  when  land  is  cheap,  and  con- 
servative when  it  is  dear.  In  the  first  place,  conservation  frequently 
requires  a  present  expenditure  in  order  to  prevent  the  waste  or 
deterioration  of  the  residuum  of  resources  not  immediately  needed. 
For  instance,  it  may  be  possible  to  retard  the  erosion  of  the  soil  by 
present  expenditures  in  terracing  and  drainage.  The  economic 
problem  involved  is  the  balancing  of  present  expenditures  against 
future  benefits.  The  more  valuable  the  natural  resource,  the  more 
likely  is  the  owner  to  pursue  a  policy  which  will  prevent  the  waste  of 
the  land  by  utilization  or  otherwise.  Moreover  the  rate  of  discount  on 
the  future  plays  an  influential  role  in  this  phase  of  conservation  as  in 
others;  for  the  higher  the  rate,  the  smaller  is  the  present  value  of  the 
expected  benefits  to  be  balanced  against  the  requisite  present  expense. 

In  the  second  place,  high  value  of  a  natural  object  is  favorable  to 
conservation  because  a  tendency  results  for  other  less  valuable 
resources  to  be  substituted  in  place  of  it. 

The  effect,  therefore,  of  the  rise  in  the  value  of  natural  resources 
is  twofold:  first,  to  increase  the  quantity  of  resources  that  are  brought 
under  utilization;  and  second  to  create  motives  for  economizing  those 
already  in  use.  In  the  one  direction  the  influence  is  favorable  to 
conservation;  in  the  other  direction,  unfavorable. 

If  we  widen  our  point  of  view  and  consider  utilization  and 
conservation  from  the  standpoint  of  society,  the  explanation  of  the 
paradox  just  noted  will  be  seen  to  arise  from  the  conditions  which 
determine  market  value. 


IV.    HUMAN  BEINGS  AS  ECONOMIC  FACTORS 
24.    SOME  DEFINITIONS  OF  LABOR 

"Labor  is  a  wealth-creating  effort "—J.  B.  Clark,  Essen- 
tials of  Economic  Theory,  chap.  i. 

"The   term  labor  ....  includes  all  human   exertion " 

— Henry  George,  Progress  and  Poverty,  Book  I,  chap.  ii. 

"Labor  is  any  human  effort  having  an  aim  or  purpose  outside 
of  itself." — F.  A.  Fetter,  The  Principles  of  Economics,  chap.  xx. 

"Labor  is  the  application  of  human  faculties  to  the  production 
of  wealth." — A.  S.  Johnson,  Introduction  to  Economics,  chap.  x. 

"Labor  is  the  voluntary  exertion  of  bodily  or  mental  faculties 
for  the  purpose  of  production." — N.  W.  Senior,  Political  Economy. 

"We  may  define  labor  as  any  exertion  of  mind  or  body  under- 
gone partly  or  wholly  with  a  view  to  some  good  other  than  the 
pleasure  derived  directly  from  the  work." — Alfred  Marshall,  Principles 
of  Economics,  Book  II,  chap.  iii. 

"Labor  may  be  properly  defined  any  sort  of  action  or  operation, 
whether  performed  by  man,  the  lower  animals,  machinery,  or  natural 
agents,  that  tends  to  bring  about  any  desirable  result." — J.  R. 
M'CuUoch,  Supplemental  Note  I  to  Smith's  Wealth  of  Nations. 

"Labor,  i.  Exertion  of  the  faculties  of  the  body  or  mind, 
especially  when  painful  or  compulsory;  bodily  or  mental  toil. 

"2.  Physical  exertion  directed  to  the  supply  of  the  material 
wants  of  the  community;  the  specific  service  rendered  to  production 
by  the  laborer  and  artisan." — Murray,  New  English  Dictionary. 

"Labor  is  ....  a  process  in  which  both  man  and  Nature 
participate,  and  in  which  man  of  his  own  accord  starts,  regulates, 
and  controls  the  material  reactions  between  himself  and  Nature. 
He  opposes  himself  to  Nature  as  one  of  her  own  forces,  setting  in 
motion  arms  and  legs,  head  and  hands,  the  natural  forces  of  his 
body,  in  order  to  appropriate  Nature's  productions  in  a  form  adapted 
to  his  own  wants." — Karl  Marx,  Capital  (Engel's  translation  , 
Vol.  I,  chap.  vii. 

"Labor  is  either  bodily  or  mental;  or,  to  express  the  distinction 
more  comprehensively,  either  muscular  or  nervous;  and  it  is  necessary 

los 


lo6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  include  in  the  idea,  not  solely  the  exertion  itself,  but  all  feelings 
of  a  disagreeable  kind,  all  bodily  inconvenience  or  mental  annoyance, 
connected  with  the  employment  of  one's  thoughts,  or  muscles,  or 
both,  in  a  particular  occupation 

"Labor  ....  in  the  physical  world,  is  always  and  solely 
employed  in  setting  objects  in  motion;  the  properties  of  matter,  the 
laws  of  nature,  do  the  rest." — John  Stuart  Mill,  Principles  of  Political 
Economy,  Book  I,  chap.  i. 

"Labor  is  the  contest  of  the  life  of  man  with  an  opposite; — the 
term  'life'  including  his  intellect,  soul  and  physical  power,  contend- 
ing with  question,  difficulty,  trial,  or  material  force 

".  ...  it  is  the  quantity  of  ...  .  loss,  or  failure  of  human 
life,  caused  by  any  effort.  It  is  usually  confused  with  effort  itself, 
or  the  application  of  power  ....  but  there  is  much  effort  which  is 
merely  a  mode  of  recreation,  or  of  pleasure.  The  most  beautiful 
actions  of  the  human  body,  and  the  highest  results  of  the  human 
intelligence,  are  conditions,  or  achievements,  of  quite  unlaborious, — 

nay,  of  recreative, — effort.     But  labor  is  the  suffering  in  effort " 

John  Ruskin,  Unto  This  Last,  §70,  and  Munera  Pulveris,  §59. 

25.    THE  RELATION  OF  LABOR  TO  NATURAL  AGENTS  IN 

PRODUCTION' 

Cases  in  which  a  certain  amount  of  labor  has  been  dispensed  with, 
its  work  being  devolved  upon  some  natural  agent,  are  apt  to  suggest 
an  erroneous  notion  of  the  comparative  functions  of  labor  and  natural 
powers;  as  if  the  co-operation  of  those  powers  with  human  industry 
were  limited  to  the  cases  in  which  they  are  made  to  perform  what 
would  otherwise  be  done  by  labor;  as  if,  in  the  case  of  things  made 
(as  the  phrase  is)  by  hand.  Nature  only  furnished  passive  materials. 
This  is  an  illusion.  The  powers  of  Nature  are  as  actively  operative 
in  the  one  case  as  in  the  other.  A  workman  takes  a  stalk  of  the 
flax  or  hemp  plant,  splits  it  into  separate  fibers,  twines  together 
several  of  these  fibers  with  his  fingers,  aided  by  a  simple  instrument 
called  a  spindle;  having  thus  formed  a  thread,  he  lays  many  such 
threads  side  by  side,  and  places  other  similar  threads  directly  across 
them,  so  that  each  passes  alternately  over  and  under  those  which 
are  at  right  angles  to  it;  this  part  of  the  process  being  facilitated  by 
an  instrument  called  a  shuttle.     He  has  now  produced  a  web  of  cloth, 

'  From  John  Stuart  Mill,  Pr»«ci/>/e5  0/ Pt)//7/ca/  Economy,  Book  I,  chap,  i,  §  2. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  107 

either  linen  or  sack-cloth,  according  to  the  material.  He  is  said  to 
have  done  this  by  hand,  no  natural  force  being  supposed  to  have 
acted  in  concert  with  him.  But  by  what  force  is  each  step  of  this 
operation  rendered  possible,  and  the  web,  when  produced,  held 
together  ?  By  the  tenacity,  or  force  of  cohesion,  of  the  fibers:  which 
is  one  of  the  forces  of  Nature,  and  which  we  can  measure  exactly 
against  other  mechanical  forces,  and  ascertain  how  much  of  any  oi 
them  it  suffices  to  neutralize  or  counterbalance. 

If  we  examine  any  other  case  of  what  is  called  the  action  of  man 
upon  Nature,  we  shall  find  in  like  manner  that  the  powers  of  Nature, 
or  in  other  words  the  properties  of  matter,  do  all  the  work,  when 
once  objects  are  put  into  the  right  position.  This  one  operation, 
of  putting  things  into  fit  places  for  being  acted  upon  by  their  own 
internal  forces,  and  by  those  residing  in  other  natural  objects,  is  all 
that  man  does,  or  can  do,  with  matter.  He  only  moves  one  thing 
to  or  from  another.  He  moves  a  seed  into  the  ground;  and  the 
natural  forces  of  vegetation  produce  in  succession  a  root,  a  stem, 
leaves,  flowers,  and  fruit.  He  moves  an  axe  through  a  tree,  and  it 
falls  by  the  natural  force  of  gravitation;  he  moves  a  saw  through  it, 
in  a  particular  manner,  and  the  physical  properties  by  which  a  softer 
substance  give  way  before  a  harder,  make  it  separate  into  planks, 
which  he  arranges  in  certain  positions,  with  nails  driven  through 
them,  or  adhesive  matter  between  them,  and  produces  a  table,  or  a 
house.  He  moves  a  spark  to  fuel,  and  it  ignites,  and  by  the  force 
generated  in  combustion  it  cooks  the  food,  melts  or  softens  the  iron, 
converts  into  beer  or  sugar  the  malt  or  cane-juice,  which  he  has 
previously  moved  to  the  spot.  He  has  no  other  means  of  acting  on 
matter  than  by  moving  it.  Motion,  and  resistance  to  motion,  are 
the  only  things  which  his  muscles  are  constructed  for.  By  muscular 
contraction  he  can  create  a  pressure  on  an  outward  object,  which,  if 
sufficiently  powerful,  will  set  it  in  motion,  or  if  it  be  already  moving, 
will  check  or  modify  or  altogether  arrest  its  motion,  and  he  can  do 
no  more.  But  this  is  enough  to  have  given  all  the  command  which 
mankind  have  acquired  over  natural  forces  immeasurably  more 
powerful  than  themselves;  a  command  which,  great  as  it  is  already, 
is  without  doubt  destined  to  become  indefinitely  greater.  He  exerts 
this  power  either  by  availing  himself  of  natural  forces  in  existence, 
or  by  arranging  objects  in  those  mixtures  and  combinations  by  which 
natural  forces  are  generated;  as  when  by  putting  a  lighted  match 
to  fuel,  and  water  into  a  boiler  over  it,  he  generates  the  expansive 


io8 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


force  of  steam,  a  power  which  has  been  made  so  largely  available 
for  the  attainment  of  human  purposes. 

Labor,  then,  in  the  physical  world,  is  always  and  solely  employed 
in  putting  objects  in  motion;  the  properties  of  matter,  the  laws  of 
nature,  do  the  rest.  The  skill  and  ingenuity  of  human  beings  are 
chiefly  exercised  in  discovering  movements,  practicable  by  their 
powers,  and  capable  of  bringing  about  the  effects  which  they  desire. 


26.  THE  INCREASE  OF  POPULATION  IN  THE  UNITED  STATES' 

Under  normal  conditions,  the  rate  of  increase  of  a  body  of  popula- 
tion slowly  decreases.  Other  things  being  equal,  as  the  density  of 
population  increases  and  as  the  difficulty  of  breadwinning  becomes 
greater  with  diminished  opportunity,  natural  increase  and  immigra- 
tion decrease.  The  rate  of  increase  may  be,  and  frequently  has  been, 
affected  by  disturbing  factors,  causing  it  to  increase  temporarily  or 
to  decrease  more  rapidly  than  normal.  As  an  illustration,  the  popu- 
lation, increases  in  numbers,  and  rates  of  increase  in  the  United  States 
by  decades  from  1790  to  1900  are  given  in  the  following  table: 


Year 


1790. 
1800. 

I8I0. 
1820. 
1830. 

1840. 

1850. 
i860, 
1870. 
1880. 

1890, 
1900, 


Population 


3,929,000 

5,308,000 

7,240,000 

9,638,000 

12,866,000 

17,069,000 

23,192,000 

31,443,000 
38,558,000 
50,156,000 
62,622,000 
75,569,000 


Increase 


1,379,000 

1,931,000 

2,399,000 

3,228,000 

4,203,000 

6,122,000 

8,251,000 

7,115,000 

n,597,ooo 

12,466,000 

12,946,000 


Rate  of  Increase 


Percentage 

•  • 

35 
36 
33 
33 
33 
36 
36 
23 
30 

25 

21 


From  1 7 So  to  1840  the  population  was  little  disturbed  and  immi- 
gration was  small,  and  the  rate  of  increase  dropped  from  35  or  36 
per  cent  to  33  per  cent.  Between  1840  and  1850  there  was  a  great 
wave  of  immigration,  which  increased  in  the  succeeding  decade  and 
raised  the  rate  of  increase  to  36  per  cent.  Then  came  the  blighting 
effects  of  the  Civil  War;  deaths  from  casualty  and  diseases  and  the 
reduction  of  births  (aided  to  an  uncertain  extent  by  omission  in  the 

'  Adapted  from  Heary  Gannett's  "Estimates  of  Future  Population,"  in  the 
Report  of  tke  National  Conservation  Commission  (iqoq),  II.  7-8. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  lOQ 

census  of  1870)  reduced  the  rate  in  that  decade  to  23  per  cent.  Be- 
tween 1870  and  1880  the  country  began  to  recover  from  the  effects 
of  the  war,  and  the  rate  of  population  increased  to  30  per  cent.  The 
succeeding  decade  witnessed  a  drop  of  5  per  cent,  and  the  following 
one  of  4  per  cent.  Thus  in  no  years  the  rate  of  increase  of  popula- 
tion has  been  reduced  from  35  to  21  per  cent.  If  normal  conditions 
prevail  in  the  future,  it  is  certain  that  the  rate  of  increase  will  con- 
tinue to  diminish  until  the  rate  reaches  that  of  the  densely  popu- 
lated countries  of  western  Europe — about  10  per  cent  increase  per 
decade.  It  will  be  noted  that  in  the  table  the  numerical  increase  has 
been  steady  excepting  for  the  period  between  i860  and  1870. 

A  great  variety  of  population  conditions  exists  in  the  United  States. 
There  are  communities  where  increase  is  supplied  wholly  by  immi- 
gration; others  receive  no  immigration,  but  are  dependent  upon  the 
excess  of  births  over  deaths;  there  are  regions  where  commerce  and 
manufacturing  cause  dense  population;  thickly  populated  farming 
regions  now  passing  into  manufacturing  communities;  prosperous 
farming  regions;  sparsely  peopled  pastoral  lands;  and  desert  wastes 
with  few  people.  All  have  different  rates  of  increase,  and  the  figures 
discussed  represent  the  total  of  all  the  different  conditions. 

27.  THE  MALTHUSIAN  THEORY  OF  POPULATION 

The  Malthusian  theory  of  population  was  formulated  in  An  Essay 
on  the  Principle  of  Population,  written  in  1798  by  Thomas  Robert 
Mai  thus  (i  766-1834),  a  young  Englishman  whose  scientific  interests 
had  turned  to  the  social  questions  of  his  time.  The  Essay  was  at  first 
an  anonymous  argument  intended  to  prove  that  the  evils  of  excessive 
human  increase  constituted  a  fatal  obstacle  in  the  way  of  certain 
visionary  schemes  of  social  equality  which  had  recently  been  proposed. 
In  later  editions,  beginning  with  1803,  the  argument  was  slightly 
modified  and  was  supported  by  historical  and  contemporary  evidence. 
The  substance  of  the  developed  argument  may  be  stated  somewhat 
as  follows. 

All  living  creatures  seem  to  be  characterized  by  a  capacity  for 
greater  increase  in  numbers  than  the  external  conditions  of  life  permit. 
In  the  case  of  man,  if  there  were  no  limits  upon  reproduction  except 
the  physiological  limits  to  procreation  and  child-bearing,  multiplica- 
tion would  continue  at  a  rapid  and  approximately  constant  rate. 
Abstractly  considered,  population  may  be  said  to  increase  naturally  in 


no  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

a  geometrical  ratio,  and  to  be  capable  of  doubling  itself  as  often  as 
once  in  every  twenty-five  years. 

In  comparison  with  this  potential  increase  of  population,  the 
actual  increase  of  the  means  of  subsistence  is  slow.  Land  is  limited. 
Methods  of  cultivation  improve,  but  not  so  much  as  to  double  and 
redouble  the  products  of  the  soil.  "It  may  be  fairly  pronounced, 
therefore,  that,  considering  the  present  average  state  of  the  earth,  the 
means  of  subsistence,  under  circumstances  the  most  favorable  to 
human  industry,  could  not  possibly  be  made  to  increase  faster  than 
in  an  arithmetical  ratio." 

The  inherent  tendency  of  population  is  thus  to  increase  faster  than 
the  means  of  its  support.  But  actual  increase  beyond  the  food  supply 
is  obviously  impossible.  That  is,  the  abstract  tendency  of  increase  of 
population  must  be  arrested  by  certain  checks.  "These  checks  to 
population,  which  are  constantly  operating  with  more  or  less  force  in 
every  society,  and  keep  down  the  number  to  the  level  of  the  means 
of  subsistence,  may  be  classed  imder  two  general  heads — the  preven- 
tive, and  the  positive  checks."  The  preventive  checks  comprise 
various  influences  which  diminish  the  possible  number  of  births ;  and 
include,  in  particular,  moral  restraint,  or  the  postponement  of  marriage, 
from  motives  of  economic  prudence,  "  with  a  conduct  strictly  moral 
during  the  period  of  this  restraint."  The  positive  checks  "include 
every  cause,  whether  arising  from  vice  or  misery,  which  in  any  degree 
contributes  to  shorten  the  natural  duration  of  human  life."  They  are 
the  forces  acting  to  reduce  already  redundant  numbers,  and  range  in 
form  from  outright  starvation  to  the  least  of  the  various  hardships  in 
which  destruction  of  life  may  be  disguised.  The  checks  are  thus  "all 
resolvable  into  moral  restraint,  vice,  and  misery,"  and  since  moral 
restraint  may  be  regarded  as  a  counsel  of  perfection,  the  pressure  of 
population  is  a  constant  source  of  want  and  wretchedness. 

The  somber  and  rather  pessimistic  tone  of  the  Malthusian  theory 
was  in  large  measure  due  to  the  background  of  economic  conditions 
prevailing  at  the  time  when  Malthus  wrote.  The  social  shock  of  the 
industrial  revolution  in  England  and  the  burden  of  foreign  war  had 
aggravated  the  evils  of  an  antiquated  system  of  poor  relief  which 
seemed  to  many  a  cause  rather  than  a  corrective  of  destitution  and 
degraded  living.  Not  surprisingly,  poverty  arising  from  overpopula- 
tion seemed  to  Malthus  an  ever-threatening  evil.  If  today  the 
gloomy  implications  of  Malthusianism  are  taken  less  seriously,  the 
explanation  is  to  be  foimd  chiefly  in  two  facts:    (i)  the  nineteenth 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS 


III 


century,  with  its  progress  in  manufacturing  methods  and  in  trans- 
portation, has  brought  an  unexpected  increase  in  our  economic 
resources;  and  (2)  new  checks  to  population  have  become  operative 
with  surprising  eJBFect  in  response  to  subtle  but  powerful  motives 
which  may  be  traced  back  to  the  increasing  exactions  and  oppor- 
tunities of  life  in  modern  society. 

28.    ECONOMIC  INFLUENCES  ON  THE  MARRIAGE-RATE' 

The  accompanying  diagrams  are  drawn  to  show  the  relation 
between  the  marriage-rate,  in  England,  and  the  extent  of  bank  clear- 
ings and  of  unemployment,  respectively.    The  curves  have  been 

Fig.  I 

CoMPARAxrvE  Fluctctations  of  the  Marriage-Rate   (Upper  Curve)   and 
Per  Capita  Bank  Cleaiongs  (Lower  Curve)  in  England,  1872-96 

1875  1880  1885  1890  1895 


» The  diagrams  are  adapted  from  G.  U.  Yule,  "  Changes  in  the  Marriage-  and 
Birth-Rates  in  England  and  Wales  During  the  Past  Half  Century,"  Journal  of 
the  Royal  Statistical  Society,  LXIX,  95-96  (March,  1906). 

The  data  plotted  in  both  diagrams  are  differences  from  periodic  means — 
9-year  means  in  Fig.  I.  and  ii-year  means  in  Fig.  II. 


112 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


plotted  in  such  a  way  as  to  eliminate  the  efTect  of  long-run  changes  in 
the  phenomena  in  question :  they  represent  in  every  case  simply  the 
annual  variations  from  the  general  trend  which  is  indicated,  arbi- 
trarily, by  the  horizontal  line  through  each  curve. 

In  Fig.  I  the  scales  are  such  that  the  maximum  fluctuations  repre- 
sent a  change  of  about  i  in  the  marriage-rate  (which  during  this 

Fig.  II 

Comparative  Fluctuations  of  the  Marriage-Rate  (Upper  Curve)  and  the 
Amount  of  Unemployment  (Lower  Curve)  in  England,  1864-96 
18C5  1870  1875  1880  1885  1890  1895 


period  averaged  roughly  16  per  thousand  of  population)  and  about 
£50  bank  clearings  per  capita.  In  Fig.  II  unemployment  is  indicated 
by  calculated  values  of  an  "index-number,"  which  makes  it  imprac- 
ticable to  state  in  simple  terms  the  absolute  amount  of  unemployment 
represented. 

29.  THE  QUALITY  OF  POPULATION 

(a)    NON-SURVIVAL  OF   THE   FITTEST' 

My  thesis  is  this:  that  the  indisputable  effect  of  the  state  of 
social  progress  and  culture  we  have  reached,  of  our  high  civilizatior 
in  its  present  stage  and  actual  form,  is  to  counteract  and  suspend  the 

•Adapted  from  W.  R.  Greg,  Enigmas  of  Life,  chap.  iii.  Triibner  &  Co., 
1872.  The  substance  of  the  passage  originally  appeared  in  Fraser's  Magazine 
(London),  September,  1868. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  I13 

Dperation  of  that  righteous  and  salutary  law  of  "natural  selection" 
'n  virtue  of  which  the  best  specimens  of  the  race — the  strongest,  the 
finest,  the  worthiest — are  those  which  survive,  multiply,  become 
paramount,  and  take  precedence;  succeed  and  triumph  in  the  struggle 
for  existence,  become  the  especial  progenitors  of  future  generations, 
continue  the  species,  and  propagate  an  ever  improving  and  perfecting 
type  of  humanity. 

The  principle  of  the  "  Survival  of  the  Fittest "  does  not  appear  to 
fail  in  the  case  of  races  of  men.  Here  the  abler,  the  stronger,  the 
more  advanced,  the  finer,  in  short,  are  still  the  favored  ones,  succeed 
in  the  competition.  The  principle  of  "natural  selection"  therefore 
— of  the  superior  and  fitter  races  of  mankind  trampling  out  and 
replacing  the  poorer  races,  in  virtue  of  their  superior  fitness — would 
seem  to  hold  good  universally. 

So  probably  it  does  also,  and  always  has  done,  in  the  case  of 
nations;  and  the  apparent  exceptions  to  the  rule  may  be  due  only 
to  our  erroneous  estimate  of  the  true  elements  of  superiority. 

But  when  we  come  to  the  case  of  individuals  in  a  people,  or  classes 
in  a  community — the  phase  of  the  question  which  has  far  the  most 
practical  and  immediate  interest  for  ourselves — the  principle  would 
appear  to  fail,  and  the  law  is  no  longer  supreme.  Civilization,  with 
its  social,  moral,  and  material  complications,  has  introduced  a  dis- 
turbing and  conflicting  element.  It  is  not  now,  as  Mr.  Wallace 
depicts,  that  intellectual  has  bean  substituted  for  physical  superiority, 
but  that  artificial  and  conventional  have  taken  the  place  of  natural 
advantages  as  the  ruling  and  deciding  force.  It  is  no  longer  the 
strongest,  the  healthiest,  the  most  perfectly  organized;  it  is  not  men 
of  the  finest  physique,  the  largest  brain,  the  most  developed  intel- 
ligence, the  best  morale,  that  are  "favored"  and  successful  "in  the 
struggle  for  existence" — that  survive,  that  rise  to  the  surface,  that 
"natural  selection"  makes  the  parents  of  future  generations,  the 
continuators  of  a  picked  and  perfected  race.  It  is  still  "the  most 
favored,"  no  doubt,  in  some  sense,  who  bear  away  the  palm,  but  the 
indispensable  favor  is  too  often  that  of  fortune,  not  of  nature.  The 
various  influences  of  our  social  system  combine  to  traverse  the 
righteous  and  salutary  law  which  God  ordained  for  the  preservation 
of  a  worthy  and  improving  humanity;  and  the  "varieties"  of  man 
that  endure  and  multiply  their  likenesses,  and  mold  the  features  of 
the  coming  times,  are  not  the  soundest  constitutions  that  can  be 
found  among  us,  nor  the  most  subtle  and  resourceful  minds,  nor  the 


114  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

most  amiable  or  self-denying  tempers,  nor  the  most  sagacious  judg- 
ments, nor  even  the  most  imperious  and  persistent  wills,  but  often 
the  precise  reverse — often  those  emasculated  by  luxury  and  those 
damaged  by  want,  those  rendered  reckless  by  squalid  poverty,  and 
those  whose  physical  and  mental  energies  have  been  sapped,  and 
whose  characters  have  been  grievously  impaired,  by  long  indulgence 
and  forestalled  desires. 

The  two  great  instruments  and  achievements  of  civilization  are 
respect  for  life  and  respect  for  property.  In  proportion  as  both  are 
secure,  as  life  is  prolonged  and  as  wealth  is  accumulated,  and  as  the 
poor  and  weak  are  cared  for,  so  nations  rise — or  consider  that  they 
have  risen.  Among  wild  animals  the  sick  and  maimed  are  slain; 
among  savages  they  succumb  and  die  or  are  suppressed;  among  us 
they  are  cared  for,  kept  alive,  enabled  to  marry  and  multiply.  In 
uncivilized  tribes,  the  ineflfective  and  incapable,  the  weak  in  body 
or  in  mind,  are  unable  to  provide  themselves  food;  they  fall  behind 
in  the  chase  or  in  the  march;  they  fall  out,  therefore,  in  the  race  of 
life.  With  us,  sustenance  and  shelter  are  provided  for  them,  and  they 
survive.  We  pride  ourselves — and  justly — on  the  increased  length 
of  life  which  has  been  effected  by  our  science  and  our  humanity. 
But  we  forget  that  this  higher  average  of  life  may  be  compatible 
with,  and  may  in  a  measure  result  from,  a  lower  average  of  health. 
We  have  kept  alive  those  who,  in  a  more  natural  and  less  advanced 
state,  would  have  died — and  who,  locking  at  the  physical  perfection 
of  the  race  alone,  had  better  have  been  left  to  die.  Among  savages, 
the  vigorous  and  sound  alone  survive;  among  us,  the  diseased  and 
enfeebled  sur\dve  as  well;  but  is  either  the  physique  or  the  intel- 
ligence of  cultivated  man  the  gainer  by  the  change  ?  In  a  wild  state, 
by  the  law  of  natural  selection,  only  or  chiefly,  the  sounder  and 
stronger  specimens  were  allowed  to  continue  their  species;  with  us, 
thousands  with  tainted  constitutions,  frames  weakened  by  malady 
or  waste,  brains  bearing  subtle  and  hereditary  mischief  in  their 
recesses,  are  suffered  to  transmit  their  terrible  inheritance  of  evil  to 
other  generations,  and  to  spread  it  through  a  whole  community. 

Security  of  property,  security  for  its  transmission  as  well  as  for 
its  enjoyment,  is  one  of  our  chief  boasts.  Thousands  upon  thousands 
who  never  could  themselves  have  acquired  property  by  industry,  or 
conquered  it  by  courage,  or  kept  it  by  strength  or  ingenuity,  and  who 
are  utterly  incompetent  to  use  it  well,  are  yet  enabled  by  law  to 
inherit  and  retain  it.    They  are  born  to  wealth,  they  revel  in  wealth, 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  115 

though  destitute  of  all  the  qualities  by  which  wealth  is  won,  or  its 
possession  made  a  blessing  to  the  community.  In  a  natural  state 
of  society  they  would  have  been  pushed  out  of  existence,  stripped 
^f  their  inherited  and  ill-used  possessions,  jostled  aside  in  the  struggle 
and  the  race,  and  left  by  the  wayside  to  die.  In  civilized  communities 
they  are  protected,  fostered,  flattered,  married,  and  empowered  to 
hand  down  their  vapid  incapacities  to  numerous  offspring,  whom 
perhaps  they  can  leave  wealthy  too.  In  old  and  highly  advanced 
nations,  the  classes  who  wield  power  and  affluence  and  social  suprem- 
acy as  a  consequence  of  the  security  of  property,  do  not  as  a  rule 
consist — ^nay,  may  consist  in  a  very  small  measure — of  individuals 
who  have  won,  or  could  have  won,  those  influences  for  themselves 
— of  natural  ''kings  of  men";  the  61ite  lots  in  life  do  not  fall  to  the 
61ite  of  the  race  or  the  community.  Those  possessions  and  that 
position,  which  in  more  simply  organized  tribes  would  be  an  indica- 
tion and  a  proof  either  of  strength,  of  inteUigence,  or  of  some  happy 
adaptation  to  surroimding  exigencies,  now  in  our  compHcated  world 
indicate  nothing — at  least  in  five  cases  out  of  six — but  merit  or  energy 
or  luck  in  some  ancestor,  perhaps  inconceivably  remote,  who  has 
bequeathed  his  rank  and  property  to  his  successors,  but  without  the 
quaUties  which  won  them  and  warranted  them.  Yet  this  property 
and  rank  still  enable  their  possibly  imworthy  and  incapable  inheritors 
to  take  precedence  over  others  in  many  of  the  walks  of  life,  to  carry 
off  the  most  desirable  brides  from  less  favored  though  far  nobler  rivals, 
and  (what  is  our  present  point)  to  make  those  brides  the  mothers 
of  a  degenerating,  instead  of  an  ever  improving  race. 

But  even  this  by  no  means  presents  the  whole  strength  of  the  case. 
Not  only  does  civilization,  as  it  exists  among  us,  enable  rank  and 
wealth,  however  diseased,  enfeebled,  or  imintelligent,  to  become  the 
continuators  of  the  species  in  preference  to  larger  brains,  stronger 
frames,  and  soimder  constitutions;  but  that  very  rank  and  wealth, 
thus  inherited  without  effort  and  in  absolute  security,  often  tend  to 
produce  enervated  and  unintelligent  offspring.  To  be  born  in  the 
purple  is  not  the  right  introduction  to  healthy  energy;  to  be  sur- 
rounded from  the  cradle  with  all  temptations  and  facilities  to  self- 
indulgence  is  not  the  best  safeguard  against  those  indulgences  which 
weaken  the  intellect  and  exhaust  the  frame.  No  doubt  noblesse 
oblige  and  riches  can  buy  the  highest  education — always  excepting 
that  education  by  siirrounding  circumstances  which  is  reaUy  the  only 
one  that  tells  very  effectually  on  the  youthful  plant.    No  doubt,  too, 


Il6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

there  are  splendid  and  numerous  exceptions — instances  in  which  rank 
is  used  to  mold  its  heir  to  its  duties,  and  in  which  wealth  is  used  to 
purchase  and  achieve  all  that  makes  life  noble  and  beneficent.  But 
we  have  only  to  look  around  us,  and  a  little  below  the  surface,  and  then 
ask  ourselves  whether,  as  a  rule,  the  owners  of  rank  and  wealth — 
still  more  the  owners  of  wealth  without  rank — are  those  from  whose 
paternity  we  should  have  most  right  to  anticipate  a  healthy,  a  noble, 
an  energetic,  or  a  truly  intellectual  offspring — a  race  fitted  to  control 
and  guide  themselves  as  well  as  others,  to  subdue  the  earth  as  well 
as  to  replenish  it,  to  govern,  to  ci\dlize,  to  illustrate,  to  carry  for- 
ward, the  future  destinies  of  man  ? 

And  if  it  is  not  from  the  highest  and  most  opulent  that  we  can 
expect  this  desiderated  posterity,  assuredly  it  is  not  from  the  lowest 
and  most  indigent.  The  physique  and  the  morale  of  both  the  extreme 
classes  are  imperfect  and  impaired.  The  physique  of  the  rich  is 
injured  by  indulgence  and  excess — that  of  the  poor  by  privation  and 
want.  The  morale  of  the  former  has  never  been  duly  called  forth 
by  the  necessity  for  exertion  and  self-denial;  that  of  the  latter  has 
never  been  adequately  cultivated  by  training  and  instruction.  The 
intellects  of  both  have  been  exposed  to  opposite  disadvantages.  The 
organizations  of  neither  class  are  the  best  in  the  community;  the 
constitutions  of  neither  are  the  soundest  or  most  untainted.  Yet 
these  two  classes  are  precisely  those  which  are,  or  are  likely  to  be, 
preponderatingly,  the  fathers  of  the  coming  generation.  Both 
marry  as  early  as  they  please  and  have  as  many  children  as  they 
please — the  rich  because  it  is  in  their  power,  the  poor  because  they 
have  no  motive  for  abstinence:  and  scanty  food  and  hard  circum- 
stances do  not  oppose  but  rather  encourage  procreation.  Malthus' 
"prudential  check"  rarely  operates  upon  the  lowest  classes;  the 
poorer  they  are,  usually,  the  faster  do  they  multiply;  certainly  the 
more  reckless  they  are  in  reference  to  multiplication.  It  is  the  middle 
classes,  those  who  form  the  energetic,  reliable,  improving  element  of 
the  population,  those  who  wish  to  rise  and  do  not  choose  to  sink, 
those,  in  a  word,  who  constitute  the  true  strength  and  wealth  and 
dignity  of  nations — it  is  these  who  abstain  from  marriage  or  post- 
pone it.  Thus  the  imprudent,  the  desperate,  those  whose  standard 
is  low,  those  who  have  no  hope,  no  ambition,  no  self-denial,  on  the 
one  side,  and  the  pampered  favorites  of  fortune  on  the  other,  take 
precedence  in  the  race  of  fatherhood,  to  the  disadvantage  or  the 
exclusion  of  the  prudent,  the  resolute,  the  striving,  and  the  self- 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  117 

restrained.  The  very  men  whom  a  philosophic  statesman,  or  a  guide 
of  some  superior  nature,  would  select  as  most  qualified  and  deserving 
to  continue  the  race  are  precisely  those  who  do  so  in  the  scantiest 
measure.  Those  who  have  no  need  for  exertion,  and  those  who  have 
no  opportunities  for  culture,  those  whose  frames  are  damaged  by 
indulgence,  and  those  whose  frames  are  weakened  by  privation,  breed 
ad  libitum:  while  those  whose  minds  and  bodies  have  been  hardened, 
strengthened,  and  purified  by  temperance  and  toil,  are  elbowed 
quietly  aside  in  the  unequal  press.  Surely  the  "selection"  is  no 
longer  "natural."  The  careless,  squalid,  unaspiring  Irishman,  fed 
on  potatoes,  living  in  a  pig-stye,  doting  on  a  superstition,  multiplies 
like  rabbits  or  ephemera;  the  frugal,  fore-seeing,  self-respecting, 
ambitious  Scot,  stern  in  his  morality,  spiritual  in  his  faith,  sagacious 
and  disciplined  in  his  intelligence,  passes  his  best  years  in  struggle 
and  in  celibacy,  marries  late,  and  leaves  few  behind  him.  Given  a 
land  originally  peopled  by  a  thousand  Saxons  and  a  thousand  Celts, 
and  in  a  dozen  generations,  five-sixths  of  the  population  would  be 
Celts,  but  five-sixths  of  the  property,  the  power,  and  the  intellect 
would  belong  to  the  one-sixth  of  Saxons  that  remained.  In  the 
eternal  "struggle  for  existence,"  it  would  be  the  inferior  and  less 
favored  race  that  had  prevailed — and  prevailed  by  virtue  not  of  its 
qualities  but  of  its  faults,  by  reason  not  of  its  stronger  vitality  but 
of  its  weaker  reticence  and  its  narrower  brain. 

Of  course  it  will  be  urged  that  the  principle  of  natural  selection 
fails  thus  utterly  because  our  civilization  is  imperfect  and  misdirected ; 
because  our  laws  are  insufiicient;  because  our  social  arrangements 
are  unwise;  because  our  moral  sense  is  languid  or  unenlightened. 
No  doubt,  if  our  legislators  and  rulers  were  quite  sagacious  and  quite 
stern,  our  people  in  all  ranks  quite  wise  and  good,  the  beneficent 
tendencies  of  nature  would  continue  to  operate  uncounteracted.  No 
constitutions  would  be  impaired  by  insufiicient  nutriment  and  none 
by  unhealthy  excess.  No  classes  would  be  so  undeveloped  either  in 
mind  or  muscle  as  to  be  unfitted  for  procreating  sound  and  vigorous 
offspring.  The  sick,  the  tainted,  and  the  maimed  would  be  too 
sensible  and  too  unselfish  to  dream  of  marrying  and  handing  down 
to  their  children  the  curse  of  diseased  or  feeble  frames;  or  if  they 
did  not  thus  control  themselves,  the  state  would  exercise  a  salutary 
but  unrelenting  paternal  despotism,  and  supply  the  deficiency  by 
vigilant  and  timely  prohibition.  A  republic  is  conceivable  in  which 
paupers  should  be  forbidden  to  propagate;    in  which  all  candidates 


Il8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

for  the  proud  and  solemn  privilege  of  continuing  an  untainted  and 
perfecting  race  should  be  subjected  to  a  pass  or  a  competitive  exami- 
nation, and  those  only  be  suffered  to  transmit  their  names  and 
famihes  to  future  generations  who  had  a  pure,  vigorous,  and  well- 
developed  constitution  to  transmit;  so  that  paternity  should  be  the 
right  and  function  exclusively  of  the  elite  of  the  nation,  and  humanity 
be  thus  enabled  to  march  on  securely  and  without  drawback  to  its 
ultimate  possibihties  of  progress.  Every  damaged  or  inferior  tem- 
perament might  be  eliminated,  and  every  special  and  superior  one 
be  selected  and  enthroned,  till  the  human  race,  both  in  its  manhood 
and  its  womanhood,  became  one  glorious  fellowship  of  saints,  sages, 
and  athletes;  till  we  were  all  Blondins,  all  Shakespeares,  Pericles', 
Socrates',  Columbuses,  and  Fenelons.  But  no  nation — in  modern 
times  at  least — has  ever  yet  approached  or  aimed  at  this  ideal;  no 
such  wisdom  or  virtue  has  ever  been  found  except  in  isolated  indi- 
vidual instances;  no  government  and  no  statesman  has  ever  yet 
dared  thus  to  supplement  the  inadequacy  of  personal  patriotism  by 
laws  so  sapiently  despotic.  The  faces  of  the  leading  peoples  of  the 
existing  world  are  not  even  set  in  this  direction — at  present  notably 
the  reverse.  The  more  marked  tendencies  of  the  age  are  three;  and 
all  three  run  counter  to  the  operation  of  the  wholesome  law  of  "natural 
selection."  We  are  learning  to  insist  more  and  more  on  the  freedom 
of  the  individual  will,  the  right  of  everyone  to  judge  and  act  for 
himself.  We  are  growing  daily  more  foolishly  and  criminally  lenient 
to  every  natural  propensity,  less  and  less  inclined  to  resent,  or  control, 
or  pimish  its  indulgence.  We  absolutely  refuse  to  let  the  poor,  the 
incapable,  the  lazy,  or  the  diseased  die;  we  enable  or  allow  them,  if 
we  do  not  actually  encourage  them,  to  propagate  their  incapacity, 
poverty,  and  constitutional  disorders.  And,  lastly,  democracy  is 
every  year  advancing  in  power,  and  claiming  the  supreme  right  to 
govern  and  to  guide;  and  democracy  means  the  management  and 
control  of  social  arrangements  by  the  least  educated  classes — by  those 
least  trained  to  foresee  or  measure  consequences,  least  acquamted 
with  the  fearfully  rigid  laws  of  hereditary  transmission,  least  habitu- 
ated to  repress  desires,  or  to  forego  immediate  enjoyment  for  future 
and  remote  good. 

(b)   EUGENICS 

The  quality  of  the  population  has  only  within  a  few  years  begun 
to  command  from  economists  and  other  students  of  social  problems 
the  attention  which  so  important  a  topic  deserves.    The  influence 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  119 

of  Malthus,  at  the  beginning  of  the  last  century,  committed  the 
economic  opinion  of  that  period  to  the  already  prevalent  view  that 
questions  of  wise  public  policy  in  regard  to  population  were  essen- 
tially questions  of  mere  numbers — the  number  of  men  who  could  be 
compelled  to  fight,  labor,  or  pay  taxes,  and  the  numerical  proportion 
between  existing  food-supply  and  the  human  beings  to  be  fed. 
Almost  no  one  then  recognized  the  menace  of  the  unequal  increase 
of  social  and  economic  classes  imequally  endowed  with  the  mental 
and  physical  characteristics  which  make  for  success.  Indeed,  the 
inequalities  of  innate  human  capacity  were  little  appreciated  until 
Darwin's  Origin  of  Species,  by  pointing  out  the  role  of  inherited 
variations  throughout  the  animal  world,  suggested  how  far-reaching 
might  be  the  effect  of  hereditary  defects  and  abilities  in  determining 
the  careers  of  individual  men,  and  even  the  whole  course  of  civiliza- 
tion. This  suggestion  presently  led  the  late  Sir  Francis  Galton  to 
publish — tentatively,  at  first,  in  1865,  and  later,  in  1869,  in  his 
classic  Hereditary  Genius — an  impressive  array  of  evidence  bearing 
on  the  inheritance  of  human  talents  and  aptitudes,  and  an  epoch- 
making  argument  in  favor  of  selective  improvement  of  the  human 
breed  as  a  promising  means  of  increasing  human  welfare.  Subse- 
quently Galton  adduced  new  proofs  of  hereditary  ability;  won  new 
followers  to  his  project  of  race-betterment,  and  raised  the  program 
of  investigations  which  he  had  begun  to  the  level  of  an  incipient 
science,  bearing  the  name,  "  Eugenics. " 

"Eugenics,"  in  the  words  of  Galton,  "is  the  study  of  agencies 
under  social  control  that  may  improve  or  impair  the  racial  qualities 
of  future  generations  either  physically  or  mentally."  Primarily  it 
is  the  study  of  hiunan  heredity  and  of  social  influences  which  act, 
through  heredity,  for  racial  degeneracy  or  racial  improvement. 

The  study  of  human  heredity  has  made  great  advances  within 
the  past  decade.  The  investigations  of  Professor  Karl  Pearson  and 
his  associates,  conducted  according  to  statistical  methods  which 
Galton  had  first  outlined,  led  to  the  important  conclusions  that 
heredity  is  as  strong  in  man  as  in  other  animals,  and  that  our  mental 
qualities  are  as  much  controlled  by  heredity  as  our  more  obvious 
physical  traits.  "All  human  qualities,"  according  to  Professor 
Pearson,  "are  inherited  in  a  marked  and  probably  equal  degree." 
As  for  the  comparative  effects  of  heredity  and  environment,  he  be- 
lieves it  "quite  safe  to  say  that  the  influence  of  environment  is  not 
one-fifth  that  of  heredity,  and  quite  possibly  not  one-tenth  of  it" 


I20  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

This  conv-iction  of  the  superior  potency  of  inheritance  is  borne  out 
by  the  results  of  other  researches,  which  not  only  have  afforded 
substantial  confirmation  of  many  of  Pearson's  generalizations,  but 
have  also  brought  out  specific  evidence  of  the  way  in  which  heredity 
transmits  such  characteristics  as  feeble-mindedness,  deaf-mutism, 
forms  of  insanity,  color-blindness,  and  a  long  list  of  other  defects. 
In  many  cases  it  is  now  possible  to  predict  with  no  little  accuracy 
the  sorts  of  disability  which  marriages  of  unsound  stocks  are  likely  to 
bring  forth.  Similarly,  the  reappearance  of  specific  aptitudes  in  gifted 
families  may  be  foretold,  though,  because  of  the  comparatively  com- 
plex and  indefinite  nature  of  such  affirmative  talents,  the  outcome  is 
here  less  certain. 

Practical  attempts  to  apply  existing  knowledge  of  heredity  in 
the  betterment  of  racial  quality  fall  under  two  heads:  positive,  or 
constructive  eugenics,  and  negative,  or  restrictive  eugenics.  On 
the  one  hand  we  may  attempt  to  develop  a  better  human  type;  on 
the  other,  we  may  content  ourselves  with  eliminating  the  worst 
lapses  from  the  normal  type  which  now  exists.  Whichever  program 
is  adopted,  applied  eugenics  must  work  mainly  through  the  force 
which  eugenic  teaching  can  bring  to  bear  on  marriage  selection. 
The  course  of  either  procedure  is  therefore  likely  to  be  obstructed 
by  ignorance,  inertia,  prejudice,  and  the  reluctance,  desirable  or 
undesirable,  which  is  aroused  by  any  attempt  to  transfer  marriage 
and  parenthood  from  the  sway  of  the  emotions  to  the  domain  of 
reason.  But  apart  from  this  general  difficulty,  positive  and  negative 
eugenics  have  their  special  and  respective  limitations.  Positive 
eugenics  is  particularly  uncertain.  Even  if  the  powers  of  heredity 
were  completely  understood  and  entirely  amenable  to  our  control, 
we  should  lack  adequate  understanding  of  the  most  desirable  human 
type  to  create.  We  cannot  assume  that  abilities  which  now  bring 
exceptional  advantages  to  exceptional  individuals  would  offer  equal 
advantages  to  all  if  possession  of  these  abilities  became  universal. 
Negative  eugenics,  indirectly,  is  beset  by  the  same  uncertainty.  More 
immediately,  it  involves  restraint  which,  if  practiced  at  all,  would 
probably  be  practiced  more  vigorously  by  the  more  thoughtful  mem- 
bers of  the  community,  with  the  result  of  still  further  aggravating 
the  disproportion  between  the  slow  increase  of  the  intellectual  classes 
and  the  teeming  multiplication  of  the  ignorant  and  improvident.  On 
the  whole,  however,  negative  eugenics  seems  thus  far  the  more  hope- 
ful.    Within  limits,  and  in  cases  where  the    action  of  heredity  is 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  121 

highly  definite,  such  restriction  of  non-eugenic  marriages,  by  social 
compulsion  or  from  individual  sense  of  duty,  holds  out  the  prospect 
of  a  real  reduction  of  human  suffering.  To  this  end,  therefore,  the 
advocates  of  eugenics,  in  growing  numbers,  are  working.  How  far 
their  efforts  have  a  scientific  justification  is  yet  to  be  proven.  At 
least  they  have  enlisted  in  their  support  the  altruism  which  offers  a 
present  self-sacrifice  for  the  welfare  of  posterity,  and  the  half-mystical 
veneration  that  an  age  of  evolutionary  ideals  feels  for  life  and  the 
continuance  of  life,  as  the  physical  process  through  which  mankind 
works  upward, 

JO.    THE  COST  TO  SOCIETY  OF  A  FAMILY  OF  DEGENERATES' 

Passing  from  the  actual  record,  I  submit  an  estimate  of  the 
damage  of  the  family,  based  on  what  is  known  of  those  whose  lives 
have  been  learned.  The  total  number  of  persons  included  in  the 
foregoing  statement  reach  709;  besides  these,  125  additional  names 
have  been  gathered  since  the  text  of  this  essay  was  prepared,  whose 
general  character  is  similar.  If  all  the  collateral  lines  which  have 
not  been  traced  could  be  added  to  the  709  here  tabulated,  the  aggre- 
gate would  reach  at  least  1,200  persons,  living  and  dead.  Now,  out 
of  700  persons  we  have  180  who  have  either  been  to  the  poor-house 
or  received  outdoor  relief  to  the  extent  of  800  years.  Allowing  that  ' 
the  best  members  of  the  family  have  emigrated,  it  would  be  a  low 
estimate  to  say  that  80  of  the  additional  500  are,  or  have  been, 
dependents,  adding  350  years  to  the  relief,  making  an  aggregate  of 
280  persons  under  pauper  training,  receiving  1,150  years  of  public 
charity.  Great  as  this  is,  it  is  not  all.  In  a  former  portion  of  this 
report,  it  was  stated  the  pauper  records  cover  255  years,  of  which 
only  64  could  be  consulted,  the  difficulties  of  getting  the  remaining 
191  years  being,  in  most  cases,  insuperable.  Allowing  that  these 
191  years  would  yield  as  many  years  of  relief  as  the  64  which  have 
actually  been  searched,  we  should  have  an  aggregate  of  2,300  years 
of  out-door  relief.  Allowing  150  years  of  alms-house  life  at  $100  a 
year,  the  sum  expended  equals  $15,000,  and  for  2,150  years  of  out- 
door relief,  at  the  moderate  rate  of  $15  a  year,  $32,250,  making  an 
aggregate  expenditure  of  $47,250  in  75  years  for  this  single  family, 
52  per  cent  of  whose  women  are  harlots  in  some  degree.     Making  a 

'From  R.  L.  Dugdale,  The  Jukes,  pp.  67-70.     New  edition,  G.  P.  Putnam's 
Sons,  1910. 


122 


MATERL\LS  FOR  ELEMENTARY  ECONOMICS 


like  computation  for  the  other  items  of  the  schedule,  allow'ing  for 
all  contingencies  a  financial  estimate  may  be  summed  up  as  follows: 


Cost 


Total  number  of  persons 

Number  of  pauperized  adults 

Cost  of  alms-house  relief 

Cost  of  out-door  relief 

Number  of  criminals  and  offenders 

Years  of  imprisorunent 

Cost  of  maintenance,  at  $200  a  year 

Number  of  arrests  and  trials 

Cost  of  arrests  and  trials,  $100  each 

Number  of  habitual  thieves,  convicted  and  uncon- 
victed   

Number  of  years  of  depredation,  at  12  years  each  . . . 

Cost  of  depredation,  $120  a  year 

Number  of  lives  sacrificed  by  murder 

Value,  at  $1,200  each. 

Number  of  common  prostitutes 

Average  number  of  years  of  debauch 

Total  number  of  years  of  debauch 

Cost  of  maintaining  each  per  year 

Cost  of  maintenance 

Number  of  women  specifically  diseased 

Average  number  of  men  each  woman  contaminates 
with  permanent  disease 

Total  number  of  men  contaminated 

Number  of  wives  contaminated  by  above  men 

Total  number  of  persons  contaminated 

Cost  of  drugs  and  medical  treatment  during  rest  of 
life,  at  $200  each 

Average  loss  of  wages  caused  by  disease  during  rest 
of  life,  in  years 

Total  years  of  wages  lost  by  400  men 

Loss,  at  $500  a  year 

Average  number  of  years  withdrawn  from  produc- 
tive industry  by  each  courtesan 

Total  number  of  years  lost  by  50  courtesans 

Value  estimated  at  $125  a  year 

Aggregate  curtailment  of  life  of  490  adults,  equiva- 
lent to  50  mature  individuals 

Cash  cost,  each  life  at  $1,200 

Aggregate  of  children  who  died  prematurely 

Average  years  of  life  of  each  child 

Cash  cost,  each  child  at  $50 

Number  of  prosecutions  in  bastardy 

Average  cost  of  each  case,  $100 

Cost  of  property  destroyed,  blackmail,  brawls' 

Average  capital  employed  in  houses,  stock,  furniture, 
etc.,  for  brothels 

Compoimd  interest  for  26  3'^ears  at  6  per  cent 

Charity  distributed  by  church 

Charity  obtained  b>'  begging 


1,200 
280 


140 
140 


250 


60 

720 


50 

15 

750 
$300.00 


40 

10 
400 

40 
440 


3 

1,200 


10 
500 


50 


300 
2 


30 


Total. 


$15,000.00 
32,250.00 


28,000.00 
25,000.00 


86,400.00 
8,400.00 


225,000.00 


88,000.00 


600,000 .  00 


62,500.00 

60,000 .  00 


15,000.00 


3,000.00 
20,000.00 

6,000.00 
18,000.00 
10,000.00 

5,450.00 


$1,308,000.00 


■Ona  house  with  fumiture  worth  $1,100  was  bamed  by  a  mob. 


HUIMAN  BEINGS  AS  ECONOMIC  FACTORS 


123 


Over  a  million  and  a  quarter  dollars  of  loss  in  75  years,  caused 
by  a  single  family  1,200  strong,  without  reckoning  the  cash  paid  for 
whiskey,  or  taking  into  account  the  entailment  of  pauperism  and 
crime  of  the  survivors  in  succeeding  generations,  and  the  incurable 
disease,  idiocy  and  insanity  growing  out  of  this  debauchery,  and 
reaching  further  than  we  can  calculate.  It  is  getting  to  be  time  to 
ask,  do  our  coiirts,  our  laws,  our  alms-houses,  and  our  jails  deal  with 
the  question  presented  ? 

31.  THE  CONSERVATION  OF  HUMAN  ENERGY' 

I.      THE   LENGTHENING   OF  LITE 

There  is  no  doubt  that  it  is  possible  to  prolong  life.  Making 
every  allowance  for  inadequacies  of  statistics,  we  have  strong  reason 
to  believe  that  hf e  is  twice  as  long  as  three  or  four  centuries  ago,  and 
modern  records  show  that  it  is  today  increasing  more  rapidly  than 
ever.  The  rate  at  which  this  lengthening  proceeds  per  century  is 
shown  in  the  following  table: 

Rate  of  Lengthening  Life  (in  Years,  Per  Century) 


Country 

England 

England. 

France 

Prussia 

Denmark 

Sweden 

United  States: 
Massachusetts 
Massachusetts 

India 


Periods 

1838-54  to  1871-81,  or  30  years. . 
1871-81  to  1891-1900,  or  20  years 
1817-31  to  1898-1903,  or  76  years 
1867-77  to  1891-1900,  or  23  years 
1835-44  to  1895-1900,  or  57  years 
1816-40  to  1891-1900,  or  67  years 

1789  to  1855,  or  66  years 

1855  to  1893-97,  or  40  years 

1881  to  1901,  or  20  years 


Males 


S 

14 
10 

25 

13 
17 


Females 


9 
16 
II 
29 
IS 
IS 


7 

14 
o 


From  this  table  we  observe: 

First.  That  the  rate  of  progress  is  extremely  variable  in  different 
countries.  It  is,  perhaps,  no  accident  that  the  maximima  rate  obtains 
in  Prussia,  which  is  probably  the  most  progressive  cotmtry  in  the 
discovery  and  application  of  scientific  medicine.  If  progress  con- 
tinues for  a  century  at  merely  the  present  rate,  human  life  in  Prussia 
will  be  twenty-five  to  twenty-nine  years  longer  than  at  present.  The 
average  rate  of  improvement  for  all  the  countries,  excepting  India,  is 
about  fifteen  years  per  century. 

'  Adapted  from  Irving  Fisher's  report  on  "National  Vitality,  Its  Wastes  and 
Conservation,"  in  the  Report  of  the  National  Conservation  Commission  (1909),  III, 
724-31,  655-69,  739-42,  748-51 


124  MATERL\LS  FOR  ELEMENTARY  ECONOMICS 

Second.  It  is  noticeable  that  in  practically  all  cases  the  improve- 
ment is  more  among  females  than  males.  This  is  one  expression  of 
the  progress  which  womankind  is  now  making  in  all  lands. 

Third.  This  table,  as  well  as  the  estimate  of  Professor  Finkeln- 
burg,  shows  that  not  only  is  the  average  duration  of  human  life 
increasing,  but  that  the  rate  of  increase  is  also  increasing.  The  esti- 
mate of  Finkelnburg  that  the  lengthening  of  life  during  the  interval 
between  the  sixteenth  century  and  the  end  of  the  eighteenth  centur>' 
was  from  eighteen  or  twenty  years  to  a  little  over  thirty  years,  shows 
a  rate  of  increase  of  about  four  years  per  century.  During  the  fol- 
lowing century  he  estimated  that  the  life  span  increased  from  a  little 
over  thirty  to  thirty-eight  or  forty  years,  or  about  nine  years  per 
century.  In  the  table  we  see  that  in  England  the  length  of  life  was 
increasing  in  the  middle  of  the  nineteenth  century  at  a  rate  of  from 
five  to  nine  years  per  century,  while  during  the  last  quarter  it  was 
increasing  at  from  fourteen  to  sixteen  years  per  century.  In  Massa- 
chusetts the  imperfect  data  indicate  that  life  lengthened  in  the  first 
half  of  the  eighteenth  century  at  the  rate  of  about  seven  years  a 
century.  The  indication  for  the  last  part  of  the  nineteenth  century 
is  that  it  increased  at  the  rate  of  fourteen  years  per  century. 

We  may  briefly  summarize  chronologically  the  general  rate  of 
increase  as  follows: 

Lengthening  of  Human  Life  per  Century 

During  seventeenth  and  eighteenth  centuries 4 

During  first  three  quarters  of  the  nineteenth  century 9 

Present  rate  in  Massachusetts 14 

Present  rate  in  Europe 17 

Present  rate  in  Prussia 27 

It  would  be  surprising  if  the  future  should  not  witness  a  further 
lengthening  of  human  life,  and  at  an  increasing  rate.  Of  course 
there  is  a  limit  to  the  further  increase  of  human  life,  but  there  is  good 
reason  to  believe  that  the  limit  is  still  far  off. 

It  has  been  estimated  that  it  is  possible  to  prolong  life  fifteen 
years.'  This  is  equivalent  to  reducing  the  death-rate  by  about  one- 
fourth.    This  estimate  is  but  a  minimum. 

n.      THE   BROADENING   OF   LITE 

Length  of  Ufe  is  but  one  indication  of  vitality.  Everyone  recog- 
nizes that  the  life  of  a  valetudinarian  or  an  invalid,  however  long,  is 

'  (The  extensive  statistical  study  upon  which  this  estimate  is  based  is  omitted. 
— Editoes.] 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  I2S 

but  a  narrow  stream.  We  may  therefore  conceive,  besides  the  dimen- 
sion of  length,  another  dimension  of  life,  which  may  be  called  its 
"breadth."  By  the  breadth  of  life  we  mean  its  healthiness.  An 
ideally  healthy  Hfe,  free  throughout  from  ailment  and  disabiHty,  is 
rarely,  if  ever,  found.  But  it  is  the  aim  of  hygiene  to  approximate 
such  an  ideal. 

a)  Prevalence  of  serious  illness. — 

The  amount  of  invalidity  or  illness  in  a  community  has  been  esti- 
mated by  a  number  of  different  investigators,  and  in  a  number  of 
different  ways.  While  the  results  vary  somewhat,  on  the  whole  they 
harmonize  fairly  well. 

The  most  careful  consideration  of  the  various  illness  statistics 
available  was  made  by  Farr.  He  finds  that  the  rate  of  invalidity 
increases  with  age,  and  at  the  later  ages  increases  with  great  rapidity. 
The  material  he  has  used  has  come  chiefly  from  various  friendly 
societies  in  Great  Britain  and  Scotland,  and  especially  from  the  East 
India  Company.  His  final  conclusion  is  probably  nearly  as  vaHd 
today  as  then.  It  is  that  corresponding  to  each  death  in  a  community, 
there  are  a  Uttle  more  than  two  years  of  illness. 

Another  way  of  expressing  the  same  fact  is  that  for  each  annual 
death,  there  are  on  the  average  two  persons  constantly  sick  during 
the  year.  Applying  this  estimate  to  the  United  States,  in  which 
about  1,500,000  persons  die  per  annum,  there  are  probably  at  all 
times  about  3,000,000  persons  seriously  ill.  This  means  an  average 
of  thirteen  days  per  annum  for  each  inhabitant * 

b)  Prevalence  of  minor  ailments. — 

The  statistics  of  morbidity  which  we  have  given,  refer  to  forms 
which  are  relatively  acute;  but  there  are  many  milder  forms  which 
do  not  incapacitate  the  patient  from  work  or  compel  him  to  take  to 
his  bed.  The  extent  of  these  milder  ills  is  not  generally  appreciated. 
They  are  often  carefully  guarded  secrets.  The  indi\ddual  often 
knows  only  his  own  physical  troubles,  but  is  unaware  of  the  fact  that 
almost  every  person  about  him  has  such  troubles  also.  Once  you 
penetrate  beneath  conventional  acquaintance  there  will  almost  invari- 
ably be  found  some  functional  impairment  of  heart,  liver,  kidneys,  or 
bladder;  or  dyspepsia,  gastritis,  jaundice,  gallstones,  constipati*^  n, 
diarrhea;  or  insomnia,  neurasthenia,  nervousness,  neuritis,  neuralgia, 

'  [One  disease  after  another  is  here  taken  up;  and  it  is  shown  how  a  consider- 
able proportion  of  serious  illness  is  preventable. — Editoes.1 


126  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

sick  headache;  or  tonsilitis,  bronchitis,  hay  fever,  catarrh,  grip,  colds, 
sore  throat;  or  rupture,  hernia,  phlebitis,  skin  eruption;  or  rheuma- 
tism, lumbago,  gout,  obesity;  or  decayed  teeth,  baldness,  deafness, 
eye  ailment,  spinal  curvature,  lameness,  broken  bones,  dislocations, 
sprains,  bruises,  cuts,  burns,  or  other  "troubles." 

That  almost  all  minor  ailments  can  be  avoided  is  scarcely  to  be 
doubted.  Doctor  Gulick  is  "inclined  to  believe  that  something  like 
nine-tenths  of  all  the  minor  ailments  that  we  have,  and  which  con- 
stitute the  chief  source  of  decreasing  our  daily  efficiency,  could  be 
removed  by  careful  attention." 

c)  Prevalence  of  undue  fatigue. — 

When  a  person  is  free  from  all  specific  ailments,  both  serious  and 
minor,  he  usually  calls  himself  "well."  There  is,  however,  a  vast 
difference  between  such  a  "well"  man,  and  one  in  ideally  robust 
health.  The  difference  is  one  of  endurance  or  susceptibility  to  fatigue. 
Many  "well"  men  cannot  nm  a  block  for  a  street  car  or  climb  more 
than  one  flight  of  stairs  without  feehng  completely  tired  out,  while 
another  "well"  man  will  run  twenty-five  miles  or  climb  the  Matter- 
horn  from  pure  love  of  sport.  The  Swiss  guides,  throughout  the 
summer  season,  day  after  day,  spend  their  entire  time  in  climbing. 
A  Chinese  coolie  will  nm  for  hours  at  a  stretch.  That  the  world 
regards  such  performances  as  "marvelous  feats  of  endurance"  only 
shows  how  marvelously  out  of  training  the  world,  as  a  whole,  really  is. 
In  mental  work  some  persons  are  unable  to  apply  themselves  more 
than  an  hour  at  a  time,  while  others,  like  Humboldt  or  Mommsen,  can 
work  almost  continuously  through  fifteen  hours  of  the  day. 

As  Mosso  and  others  have  proved,  muscular  fatigue  is  a  chemical 
effect,  due  to  the  circulation  of  "fatigue  poisons"  in  the  blood.  This 
has  been  strikingly  shown  by  experiments  by  Weishardt  and  others 
on  dogs;  when  blood  is  transfused  from  an  exhausted  dog  to  a  "  frisky  " 
one,  the  latter  immediately  wilts  and  becomes  fatigued  like  the 
former,  although  he  has  not  exerted  himself  in  the  least.  In  order  to 
reduce  fatigue,  therefore,  we  should  keep  down  fatigue  poisons.  It  is 
not  unlikely  that  almost  all  poisons  produce  fatigue,  whether  the 
poisons  come  from  infections,  from  drugs,  from  impure  or  excessive 
food,  from  bad  air,  or  from  exertion ' 

'  [Here  follows  a  discussion  of  the  various  causes  of  fatigue,  such  as  the  use  of 
alcohol  and  tobacco,  improper  diet,  overexertion,  excessive  hours  of  labor,  etc. — 
ElDiToas.l 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  127 

The  economic  waste  from  undue  fatigue  is  probably  much  greater 
than  the  waste  from  serious  illness.  We  have  seen  that  the  average 
serious  illness  per  capita  is  usually  about  two  weeks  each  year.  This 
is  about  4  per  cent  of  the  year.  Expressed  differently,  about  4  per 
cent  of  the  population  is  constantly  sick. 

On  the  other  hand,  the  niunber  that  suffer  partial  disability 
through  undue  fatigue,  certainly  constitute  the  great  majority  of  the 
population.  No  observer  can  fail  to  conclude  that  this  is  true  of  the 
American  working,  business,  and  professional  classes,  and  the  latest 
word  among  the  students  of  school  hygiene  is  that  it  is  true  to  a 
large  extent  even  among  children.  If,  therefore,  we  assiune  that  only 
50  per  cent  of  the  population  is  suffering  some  impairment  of  its  best 
powers  through  undue  fatigue,  we  are  on  safe  ground.  The  extent 
to  which  the  power  of  this  supposed  50  per  cent  of  the  population  is 
impaired  must  certainly  exceed  10  per  cent.  When  we  consider  that 
young  men,  supposed  to  be  perfectly  well,  have  the  enormous  room 
for  improvement  indicated  in  this  chapter,  and  when  we  consider  the 
gratifying  results  of  experiments  with  a  shorter  work  day,  it  will  be 
seen  that  the  true  impairment  is  probably  several  times  10  per  cent. 
Yet,  if  only  50  per  cent  of  the  population  are  suffering  an  impairment 
equal  to  only  10  per  cent  of  their  working  powers,  the  result  is 
equivalent  to  5  per  cent  of  the  population  suffering  total  impairment, 
which  is  more  than  the  4  per  cent  impairment  from  serious  illness. 

The  relatively  slight  impairment  of  efl&ciency  due  to  overfatigue 
leads  to  more  serious  impairment.  Just  as  minor  ailments  prove  to 
have  an  unsuspected  importance  when  considered  as  gateways  to 
serious  illness,  so  the  inefficiency  from  fatigue  is  vested  with  great 
significance  as  the  first  step  toward  minor  ailments.  Obviously,  if 
overfatigue  could  be  reduced  to  a  minimum,  this  reduction  would 
carry  with  it  the  prevention  of  the- major  part  of  minor  ailments, 
which  in  turn  would  lead  to  a  great  reduction  in  more  serious  illness, 
and  this  finally  would  lead  to  a  great  reduction  in  mortahty.  A 
typical  succession  of  events  is  first  fatigue,  then  colds,  then  tubercu- 
losis, then  death.  Prevention,  to  be  effective,  must  begin  at  the 
beginning. 

m.      THE   MONEY  VALUES   OF  PREVENTABLE  WASTES 

Estimates  of  the  money  value  of  preventable  wastes  depend  on 
the  valuation  of  human  life,  of  which  several  appraisals  have  been 
attempted.  ....  We  take,  in  the  absence  of  any  good  statistics. 


128 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


S700  per  annum  as  a  guess,  but  a  safe  minimum  for  the  average 
earnings  of  the  workers  of  all  grades,  from  day  laborers  to  railroad 
presidents.  This  assumes  that  all  of  the  working  years  are  actually 
employed  in  work.  But,  since  about  one-fourth  of  the  persons  of 
working  age  are  not  workers,  but  are  supported  (for  the  most  part) 
by  earnings  of  capital,  the  average  should  be  cut  down  to  three- 
fourths  of  this  figure,  or  $525. 

Using  this  as  a  basis,  we  may  compute  the  minimum  worth  of  the 
average  American  life  at  different  ages,  as  follows: 


Age 

Net  Worth  of 

a  Person,  in 

Dollars 

Age 

Net  Worth  of 

a  Person,  in 

Dollars 

0 

90 

950 
2,000 
4,000 

1 

^o 

4,100 
2,900 
—  700 

e 

CO 

10    

80 

20    

From  the  table  from  which  these  figures  are  taken  it  is  possible  to 
base  minimum  estimates  for  (i)  the  average  economic  value  of  the 
inhabitants  of  the  United  States  by  using  the  census  figures  for  age 
distribution  of  population;  this  calculated  average  is  $2,900;  (2)  the 
average  economic  value  of  the  lives  now  sacrificed  by  preventable 
deaths,  using  the  age  distribution  of  deaths,  and  the  percentages  of 
preventability;   this  calculated  average  is  $1,700. 

The  first  figure  shows  thjat  what  might  be  called  the  vital  assets 
of  the  United  States  for  the  population  of  over  85,500,000,  as  estimated 
for  1907  by  the  census,  amount  in  value  to  85,5oo,oooX$2,9oo,  or 
$250,000,000,000,  which,  though  a  minimum  estimate,  greatly  exceeds 
the  value  of  all  other  wealth ;  the  second  figure  enables  us  to  estimate 
the  needless  waste  of  our  vital  assets. 

If  we  take  the  estimate  of  Professor  VVillcox  of  the  death-rate  in 
the  United  States,  as  at  least  18  per  1,000  for  the  85,500,000  persons 
estimated  by  the  census  as  the  population  of  the  United  States  in 
1907,  we  have  1,500,000  as  the  number  of  deaths  in  the  United  States 
per  annum.  Of  these  1,500,000  deaths,  42  per  cent,  or  630,000,  are 
annually  preventable  or  postponable.  Since  each  postponement 
would  save  on  the  average  $1,700,  the  national  annual  unnecessary 
loss  of  capitalized  net  earnings  is  63o,oooX$i,7oo,  or  $1,070,000,000, 
or  about  $1,000,000,000. 

With  our  present  population,  there  are  always  about  3,000,000 
persons  in  the  United  States  on  the  sick  list.     For  the  most  part,  these 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  12^ 

persons  are  older  than  the  average.  Farr  gives  a  table  showing  that 
morbidity  increases  with  age  in  geometric  progression.  By  means  of 
his  table  we  may  calculate  on  the  same  basis  as  the  previous  calcula- 
tions— that  of  the  3,000,000  sick,  very  close  to  a  third,  or  1,000,000 
persons,  are  in  the  working  period  of  life.  Assuming  that  average 
earnings  in  the  working  period  are  $700,  and  that  only  three-fourths 
of  the  one  million  potential  workers  would  be  occupied,  we  find  over 
$500,000,000  as  the  minimum  loss  of  earnings. 

The  cost  of  medical  attendance,  medicine,  nursing,  etc.,  is  con- 
jectured by  Dr.  Biggs  in  New  York,  to  average  for  the  consumptive 
poor  at  least  $1.50  per  day  of  illness.  The  cost  per  day  of  other 
illnesses  than  tuberculosis  is  presumably  greater,  and  also  the  cost  per 
day  for  other  classes  is  higher  than  for  the  poor.  Applying  this  to 
the  3,000,000  years  of  illness  annually  experienced,  we  should  have 
$1,500,000,000  in  all  as  the  minimum  annual  cost  of  this  kind. 

The  statistics  of  the  Commissioner  of  Labor  show  that  the  average 
expenditure  for  illness  and  death  amounts  to  $27  per  annum.  This  is 
for  workingmen's  families  only.  But  even  this  figure,  if  applied  to 
the  17,000,000  families  of  the  United  States,  would  make  the  totjil 
bill  for  caring  for  illness  and  death  $460,000,000.  The  true  cost  may 
well  be  more  than  twice  this  sum.  Certainly  this  estimate  is  more 
than  safe,  and  is  only  one-third  of  the  sum  obtained  by  using  Dr. 
Biggs's  estimate. 

The  sum  of  the  costs  of  illness,  including  loss  of  wages  and  cost  of 
care,  is  thus  $460,000,000-!- $500,000,000,  or  $960,000,000. 

The  above  estimate  is  a  general  one  for  all  illness.  It  would  be 
possible  to  offer  figures  for  the  particular  losses  from  particular  dis- 
eases. Thus,  from  tuberculosis,  the  gross  loss  of  earnings  by  illness 
and  of  potential  earnings  cut  off  by  death,  together  with  the  expenses 
of  illness,  etc.,  amount  to  over  $1,000,000,000  per  annum. 

Of  the  sum  mentioned,  the  loss  to  the  consumptives  themselves 
amounts  to  over  $660,000,000,  leaving  $440,000,000  as  the  loss  to 
other  members  of  the  community.  At  least  three-fourths  of  these 
costs  are  preventable.  Dr.  George  M.  Kober  thinks  it  is  conservative 
to  say  that  the  annual  cost  of  typhoid  in  the  United  States  is  $350,- 
000,000,  and  Dr.  L.  O.  Howard  believes  that  malaria  alone  costs  the 
country  $100,000,000  annually,  and  the  insect  diseases  generally 
$200,000,000.  He  points  out  that  one  great  item  of  loss  is  the  reduced 
value  of  real  estate  in  malarial  regions.  By  drainage  and  destruction 
of  mosquitos,  most  of  this  waste  could  be  saved.     The  cost  of  the 


130  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

care  of  the  insane  and  feeble-minded  is  estimated  by  Charles  L.  Dana 
at  $85,000,000  annually.  What  fraction  of  these  costs  is  preventable 
it  is  difficult  to  say.  The  economic  loss  due  to  alcohol  has  been 
variously  estimated.  Of  the  billion  dollars  or  more  found  to  repre- 
sent the  cost  of  illness,  by  far  the  major  part  is  certainly  avoidable. 
This  is  the  belief  of  the  best  observers,  such  as  Dr.  Gulick,  Dr.  Kellogg, 
Mrs.  Richards,  Dr.  Anderson,  and  others.  Unfortunately,  there  are 
no  exact  statistics  of  preventability.  We  feel  safe,  however,  in  con- 
cluding that  at  least  half  a  billion  could  be  saved  from  the  present 
cost  of  illness.  This,  added  to  the  loss  by  preventable  deaths  of 
potential  earnings  of  a  billion,  gives  at  least  a  billion  and  a  half  of 
preventable  waste.  This  does  not  include  the  losses  from  inefficient 
work  due  to  drunkenness  or  other  vicious  habits;  nor  does  it  include 
the  cost  of  "undue  fatigue,"  which  we  have  some  reason  to  believe 
exceeds  in  its  effect  on  efficiency  the  loss  from  illness.  But  it  would 
not  be  possible  to  state  this  loss  in  any  definite  or  convincing  figures. 

The  actual  economic  saving  annually  possible  in  this  country  by 
preventing  needless  deaths,  needless  illness  (serious  and  minor),  and 
needless  fatigue,  is  certainly  far  greater  than  one  and  a  half  billions, 
and  may  be  three  or  more  times  as  great. 

Dr.  George  M.  Gould  estimated  that  sickness  and  death  in  the 
United  States  cost  $3,000,000,000  annually,  of  which  at  least  a  third 
is  regarded  as  preventable. 

IV.      THINGS   WHICH  NEED   TO   BE  DONE 

In  order  that  American  vitaUty  may  reach  its  maximum  develop- 
ment, many  things  need  to  be  done.    Among  them  are  the  following: 

1.  The  national  government,  the  states,  and  the  municipalities 
should  steadfastly  devote  their 'energies  and  resources  to  the  protec- 
tion of  the  people  from  disease.  Such  protection  is  quite  as  properly 
a  governmental  function  as  is  protection  from  foreign  invasion,  from 
criminals,  or  from  fire.  It  is  both  bad  policy  and  bad  economy  to 
leave  this  work  mainly  to  the  weak  and  spasmodic  efforts  of  charity, 
or  to  the  philanthropy  of  physicians. 

2.  The  national  government  should  exercise  at  least  three  public- 
health  functions:  first,  investigation;  second,  the  dissemination  of 
information;  third,  administration. 

It  should  remove  the  reproach  that  more  pains  are  now  taken  to 
protect  the  health  of  farm  cattle  than  of  human  beings.  It  should 
provide  more  and  greater  laboratories  for  research  in  preventive 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  131 

medicine  and  public  hygiene.  Provision  should  also  be  made  for 
better  and  more  universal  vital  statistics,  without  which  it  is  impos- 
sible to  know  the  exact  conditions  in  an  epidemic,  or,  in  general,  the 
sanitary  or  insanitary  conditions  in  any  part  of  the  country.  It 
should  aim,  as  should  state  and  mimicipal  legislation,  to  procure 
adequate  registration  of  births,  statistics  of  which  are  at  present 
lacking  throughout  the  United  States. 

The  national  government  should  prevent  transportation  of  disease 
from  state  to  state  in  the  same  way  as  it  now  provides  for  foreign 
quarantine  and  the  protection  of  the  nation  from  the  importation  of 
disease  by  foreign  immigrants.  It  should  provide  for  the  protection 
of  the  passenger  in  interstate  railway  travel  from  infection  by  his 
fellow-passengers  and  from  insanitary  conditions  in  sleeping-cars,  etc. 

It  should  enact  suitable  legislation  providing  against  pollution  of 
interstate  streams. 

It  should  provide  for  the  dissemination  of  information  in  regard 
to  the  prevention  of  tuberculosis  and  other  diseases,  the  dangers  of 
impure  air,  impure  foods,  impure  milk,  imperfect  sanitation,  ventila- 
tion, etc.  Just  as  now  the  Department  of  Agriculture  supplies 
specific  information  to  the  farmer  in  respect  to  raising  crops  or  live 
stock,  so  should  one  of  the  departments,  devoted  principally  to  health 
and  education,  be  able  to  provide  every  health  ofl&cer,  school  teacher, 
employer,  physician,  and  private  family  with  specific  information  in 
regard  to  public,  domestic,  and  personal  hygiene. 

It  should  provide  for  making  the  national  capital  into  a  model 
sanitary  city,  free  from  insanitary  tenements  and  workshops,  air 
pollution,  water  pollution,  food  pollution,  etc.,  with  a  rate  of  death 
and  a  rate  of  illness  among  infants  and  among  the  population  generally 
so  low  and  so  free  from  epidemics  of  typhoid  or  other  diseases  as  will 
arouse  the  attention  of  the  entire  country  and  the  world. 

There  should  be  a  constant  adaptation  of  the  pure-food  laws  to 
changing  conditions.  Meat  inspection,  and  other  inspection,  should 
be  so  arranged  as  to  protect,  not  only  foreigners,  but  our  own  citizens. 
The  existing  health  agencies  of  the  government  should  be  concentrated 
in  one  department,  better  co-ordinated,  and  given  more  powers  and 
appropriations. 

3.  State  boards  of  health  and  state  legislation  should  provide  for 
the  regulation  of  labor  of  women,  should  make  physiological  condi- 
tions for  women's  work,  and  prevent  their  employment  before  and 
after  childbirth;   should  regulate  the  age  at  which  children  shall  be 


132  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

employed,  make  reasonable  regulations  in  regard  to  hours  of  labor 
and  against  the  dangers  in  hazardous  trades,  and  especially  against 
the  particular  dangers  of  dust  and  poisonous  chemicals;  should  make 
regulations  for  sanitation  and  provide  inspection  of  factories,  schools, 
asylums,  prisons,  and  other  public  institutions.  Where  municipalities 
have  not  the  power  to  enact  the  legislation  above  mentioned  with 
reference  to  local  conditions,  the  necessary  legislation  or  authority 
should  be  provided  by  the  state.  Or  where,  by  reason  of  the  small 
size  of  the  town,  no  sufficient  local  action  is  possible,  the  state  should 
exercise  the  necessary  functions.  It  should,  in  such  cases,  advise  and 
supervise  local  boards  of  health.  It  should  have  an  engineering 
department  and  advise  regarding  the  construction  of  sewers  and  water 
supplies.  Pollution  of  such  supplies,  unless  entirely  local,  should  be 
prevented  by  the  state,  which  should  be  equipped  with  laboratories 
for  the  analysis  of  water,  milk,  and  other  foods.  Suitable  legislation 
should  be  passed  regulating  the  sale  of  drugs,  especially  preparations 
containing  cocaine,  opium,  or  alcohol.  Legislation — not  too  far  in 
advance  of  public  sentiment  needed  to  enforce  it — should  be  passed 
regulating  the  sale  of  alcoholic  beverages.  State  registration  of 
births,  deaths,  and  cases  of  illness  should  be  much  more  general  and 
efficient  than  at  present.  ■ 

4.  Municipal  boards  of  health  need  to  have  more  powers  and 
greater  appropriations;  less  political  interference  and  better  trained 
health  ofiicers;  more  support  in  public  opinion.  Their  ordinances  in 
regard  to  expectoration,  notification  of  infectious  disease,  etc.,  should 
be  better  enforced  by  the  police  departments. 

More  legislation  should  be  advocated,  passed,  and  enforced  to 
the  end  that  streets  may  be  kept  clean,  garbage  properly  removed, 
sewage  properly  disposed  of,  air  pollution  of  all  kinds  prevented, 
whether  by  smoke,  street  dust,  noxious  gases,  or  any  other  source. 
Noises  also  should  be  lessened. 

Municipalities  need  also  to  take  measures  to  prevent  infection 
being  carried  by  flies,  mosquitoes,  other  insects  and  vermin,  and  by 
prostitution.  They  need  to  guard  with  greater  care  the  water  supply, 
and  in  many  cases  to  filter  it;  they  should  make  standards  for  milk 
purity  and  enforce  them;  they  should  also  regularly  inspect  other 
foods  exposed  for  sale;  provide  for  sanitary  inspection  of  local  slaugh- 
ter houses,  dairies,  shops,  lodging  and  boarding-houses,  and  other 
establishments  within  the  power  of  the  particular  municipality;  they 
should  make  and  enforce  stricter  building  laws,  especially  as  relating 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  133 

to  tenements,  to  the  end  that  dark-room  tenements  may  be  elimi- 
nated and  all  tenements  be  provided  with  certain  minimum  standard 
requirements  as  to  light,  air,  and  sanitary  arrangements. 

5.  School  children  should  be  medically  inspected  and  school 
hygiene  universally  practiced.  This  involves  better  protection 
against  school  epidemics,  better  ventilation,  light,  and  cleanliness  of 
the  schoolroom,  the  discovery  and  correction  of  adenoids,  eye  strain, 
and  nervous  strain  generally,  and  the  provision  for  playgrounds. 
Sound  scientific  hygiene  should  be  taught  in  all  schools,  public,  pri- 
vate, normal,  and  technical,  as  also  in  colleges  and  universities. 

6.  The  curricula  of  medical  schools  should  be  rearranged  with  a 
greater  emphasis  on  prevention  and  on  the  training  of  health  officers. 
Sanatoria  and  hospitals,  dispensaries,  district  nursing,  tuberculosis 
classes,  and  other  semi-public  institutions  should  be  increased  in 
number  and  improved  in  quality.  The  medical  profession,  keeping 
pace  with  these  changes,  should  be  the  chief  means  of  conveying 
their  benefits  to  the  public.  Universities  and  research  institutions 
need  to  take  up  the  study  of  hygiene  in  all  its  branches.  Now  that 
the  diseases  of  childhood  are  receiving  attention,  the  next  step  should 
be  to  study  the  diseases  of  middle  life.  These  are  diseases,  to  a  large  ex- 
tent, of  nutrition  and  circulation,  and  consequently  these  subjects  should 
receive  special  attention.  Intelligent  action  must  rest  on  knowledge, 
and  knowledge  of  preventing  disease  is  as  yet  extremely  imperfect. 

7.  In  industrial  and  commercial  establishments  employers  may 
greatly  aid  the  health  movement,  and  in  many  cases  make  their  phi- 
lanthropy self-supporting  by  providing  social  secretaries,  lunch  and 
rest  rooms,  physiological  (generally  shorter)  hours  of  work,  pro- 
vision for  innocent  amusements,  seats  for  women,  etc. 

Life  insurance  companies  could  properly  and  with  much  profit 
club  together  to  instruct  their  risks  in  self-care  and  secure  general 
legislation  and  enforcement  of  legislation  in  behalf  of  public  health. 

8.  The  present  striking  change  in  personal  habits  of  living  should  be 
carried  out  to  its  logical  conclusion  until  the  health  ideals  and  the  ideals 
of  athletic  training  shall  become  universal.  This  change  involves  a 
quiet  revolution  in  habits  of  living,  a  more  intelligent  utilization  of  one's 
environment,  especially  in  regard  to  the  condition  of  the  air  in  our 
houses,  the  character  of  the  clothes  we  wear,  of  the  site  and  architec- 
ture of  the  dwelling  with  respect  to  sunlight,  soil,  ventilation,  and  sani- 
tation, the  character  of  food,  its  cooking,  the  use  of  alcohol,  tobacco, 
and  drugs,  and  last,  but  not  least,  sex  hygiene  in  all  its  bearings. 


134  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

9.  The  fight  against  disease  will  aid  in  the  fight  against  pauper- 
ism and  crime.  It  is  also  true  that  any  measures  which  tend  to 
eliminate  poverty,  vice,  and  crime  will  tend  to  improve  sanitar)/ 
conditions. 

10.  Finally,  eugenics,  or  hygiene  for  future  generations,  should  be 
studied  and  gradually  put  in  practice.  This  involves  the  prohibi- 
tion of  flagrant  cases  of  marriages  of  the  unfit,  such  as  syphilitics, 
the  insane,  feeble-minded,  epileptics,  paupers,  or  criminals,  etc.  The 
example  of  Indiana  in  this  regard  should  be  considered  and  followed 
by  other  states,  as  also  in  regard  to  the  unsexing  of  rapists,  criminals,  ■ 
idiots,  and  degenerates  generally.  A  public  opinion  should  be  aroused 
which  will  not  only  encourage  healthy  and  discountenance  degenerate 
marriages,  but  will  become  so  imbedded  in  the  minds  of  the  rising 
generation  as  will  unconsciously,  but  powerfully,  affect  their  marriage 
choices. 

32.   CAUSES  OF  THE  GROWTH  OF  CITIES^ 

The  industries  of  the  human  race  may  be  conveniently  grouped 
thus:  (i)  extractive,  including  agriculture,  mining;  (2)  distributive, 
including  commerce,  wholesale  and  retail  trade,  transportation,  com- 
munication, and  all  the  media  of  exchange;  (3)  manufacturing; 
(4)  services  and  free  incomes,  including  domestic  servants,  govern- 
ment oflScials,  professional  men  and  women,  students,  etc. 

The  extractive  industries  generally  require  the  dispersion  of  the 
persons  engaged  therein.*  In  particular,  agriculture,  the  principal 
extractive  industry,  cannot  be  prosecuted  by  persons  residing  in  large 
groups.  It  is  conceivable  that  transportation  methods  might  be  so 
perfected  as  to  permit  the  cultivator  of  the  soil  to  reside  in  a  city,  but 
it  is  very  unlikely.  On  the  contrary,  the  improvements  heretofore 
made  in  transportation  have  only  strengthened  the  dispersion  of  the 
agricultural  population  by  permitting  uninhabited  parts  of  the  earth's 
surface  to  be  settled  and  brought  into  cultivation.  This  will  probably 
be  the  development  of  the  future  as  far  as  human  eyes  can  see. 

The  distributive  industries,  on  the  other  hand,  are  distinctly 
centralizing  in  their  effects  upon  the  distribution  of  the  population 

•  Adapted  from  Adna  F.  Weber,  The  Growth  of  Cities  in  the  Nineteenth  Century, 
pp.  223-29.  Columbia  University  Studies  in  History,  Economics  and  Public  Law, 
Vol.  XI,  1899. 

» In  mining  districts,  it  is  true,  the  population  is,  oftener  than  not,  quite  dense. 
Nevertheless,  it  is  seldom  concentrated  in  great  cities,  the  Transvaal  being  an  ex- 
ception to  the  general  rule. 


HUM.\N  BEINGS  AS  ECONOMIC  FACTORS  13S 

engaged  in  them.  As  methods  of  distribution  have  been  improved 
and  the  distributive  area  enlarged,  the  tendency  toward  concentration 
has  increased.  The  consoHdation  of  two  railway  lines  transfers 
employees  from  the  junction  to  the  terminal  city.  Every  improve- 
ment in  the  mechanism  of  exchange  favors  the  commercial  center.  Of 
even  greater  importance  is  the  fact  that  the  production  of  wealth  is 
increasing  at  leaps  and  bounds;  every  year  there  is  vastly  greater 
wealth  to  distribute,  and  the  process  of  distribution  will  require  a 
growing  percentage  of  all  the  workers  for  its  efficient  action.  Hence, 
the  more  the  social  organism  grows,  and  the  higher  its  evolution,  so 
much  greater  will  the  commercial  centers  become. 

Manufacturing  industries  also  tend  toward  the  concentration  of 
population,  and  up  to  recent  years  manufacturing  centers  were  co- 
incident with  the  commercial  centres,  i.e.,  the  great  cities.  Recently 
the  equalization  of  transportation  facilities  and  the  excessive  rents 
of  great  cities  have  caused  the  managers  of  a  good  many  industries 
to  abandon  them  as  sites  in  favor  of  the  suburb  or  small  towTi.  The 
reason  that  this  movement  does  not  make  for  complete  decentraliza- 
tion is  that  production  on  a  large  scale  is  the  goal  toward  which  all 
industries  are  tending  with  enlarging  and  more  regular  markets,  and 
more  convenient  means  of  communication ;  and  production  on  a  large 
scale  requires,  as  a  rule,  the  large  factory  and  the  grouping  of  allied 
trades.  Other  obstacles  to  decentralization  are  the  presence  in  the 
large  city  of  a  supply  of  cheap,  unskilled  labor;  of  the  best  knowledge 
of  art  and  technique;  and  especially  of  numerous  industries  whose 
products  are  intended  for  local  consumption. 

The  remainder  of  the  population  will  in  the  main  follow  where  the 
preceding  classes  lead.  Those  engaged  in  the  professions  or  the 
rendering  of  personal  service  must  reside  near  the  consumers  of  their 
products,  that  is,  where  people  are  numerous  and  money  is  plenty. 

Thus  it  appears  that  the  efficient  industrial  organization  of  a 
nation  on  modem  lines  requires  the  concentration  of  population 
in  virtually  all  the  industries  except  agriculture;  and  since  this 
industry,  for  several  decades,  has  been  able  to  deliver  its  product 
by  employing  a  continually  smaller  proportion  of  the  total  popula- 
tion, it  follows  that  the  proportion  in  the  centers  of  population  has 
been  increasing. 

In  the  immediate  future,  we  may  expect  to  see  a  continuation  of 
the  centralizing  movement.  While  many  manufacturers  are  locating 
their  factories  in  the  small  cities  and  towns,  there  are  other  industries 


136  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

that  prosper  most  in  the  great  cities.  Commerce,  moreover,  em- 
phatically favors  the  great  centers,  rather  than  the  small  or  inter- 
mediate centers.  And  since,  with  ever-increasing  production  flowing 
from  improved  methods,  commerce  and  trade  are  constantly  expand- 
ing and  absorbing  an  increasing  proportion  of  the  population,  while 
manufacturing  in  a  country  where  it  has  reached  the  stage  of  self- 
sufficiency  employs  a  constant  or  even  declining  proportion  of  the 
population,  the  prospect  is  that  the  larger  cities,  including  of  course 
their  suburbs,  will  continue  to  absorb  the  superfluous  population  of 
the  rural  districts  and  villages. 


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138  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

34.    SOURCES  OF  IMMIGRATION  AND  CHARACTER  OF 

IMMIGRANTS' 

From  1820  to  June  30, 1910,  27,918,992  immigrants  were  admitted 
to  the  United  States.  Of  this  number  92.3  per  cent  came  from 
European  countries,  which  countries  are  the  source  of  about  93.7 
per  cent  of  the  present  immigration  movement.  From  1820  to 
1883  more  than  95  per  cent  of  the  total  immigration  from  Europe 
originated  in  the  United  Kingdom,  Germany,  Scandinavia,  the 
Netherlands,  Belgium,  France,  and  Switzerland.  In  what  follows 
the  movement  from  these  countries  will  be  referred  to  as  the  "old 
immigration."  Following  1883  there  was  a  rapid  change  in  the 
ethnical  character  of  European  immigration,  and  in  recent  years 
more  than  70  per  cent  of  the  movement  has  originated  in  southern 
and  eastern  Europe.  The  change  geographically,  however,  has  been 
somewhat  greater  than  the  change  in  the  racial  character  of  the 
immigration,  this  being  due  very  largely  to  the  number  of  Germans 
who  have  come  from  Austria-Himgary  and  Russia.  'The  move- 
ment from  southern  and  eastern  Europe  will  be  referred  to  as  the  "new 
immigration."  In  a  single  generation  Austria-Hungary,  Italy,  and 
Russia  have  succeeded  the  United  Kingdom  and  Germany  as  the  chief 
sources  of  immigration.  In  fact,  each  of  the  three  countries  first 
named  furnished  more  immigrants  to  the  United  States  in  1907  than 
came  in  the  same  year  from  the  United  Kingdom,  Germany,  Scandi- 
navia, France,  the  Netherlands,  Belgium,  and  Switzerland  combined. 

The  old  immigration  movement  in  recent  years  has  rapidly  declined, 
both  numerically  and  relatively,  and  under  present  conditions  there 
are  no  indications  that  it  will  materially  increase.  The  new  immi- 
gration movement  is  very  large,  and  there  are  few,  if  any,  indications 
of  its  natural  abatement.  The  new  immigration,  coming  in  such 
large  numbers,  has  provoked  a  widespread  feeling  of  apprehension  as 
to  its  effect  on  the  economic  and  social  welfare  of  the  country 

The  old  immigration  movement  was  essentially  one  of  permanent 
settlers.  The  new  immigration  is  very  largely  one  of  individuals  a 
considerable  proportion  of  whom  apparently  have  no  intention  of 
permanently  changing  their  residence,  their  only  purpose  in  coming 
to  America  being  to  temporarily  take  advantage  of  the  greater  wages 
paid  for  industrial  labor  in  this  country.  This,  of  course,  is  not  true 
of  all  the  new  immigrants,  but  the  practice  is  sufficiently  common  to 

'  From  Reports  of  the  Immigration  Commission  (191 1),  I,  23-24. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS 


139 


warrant  referring  to  it  as  a  characteristic  of  them  as  a  class.  From 
all  data  that  are  available  it  appears  that  at  least  40  per  cent  of  the 
new  immigration  movement  returns  to  Europe  and  that  about  two- 
thirds  of  those  who  go  remain  there.  This  does  not  mean  that  all  of 
these  immigrants  have  acquired  a  competence  and  returned  to  live 
on  it.  Among  the  immigrants  who  return  permanently  are  those  who 
have  failed,  as  well  as  those  who  have  succeeded.  Thousands  of 
those  returning  have,  under  unusual  conditions  of  climate,  work, 
and  food,  contracted  tuberculosis  and  other  diseases;  others  are 
injured  in  our  industries;  still  others  are  the  widows  and  children  of 

Immigration  to  the  United  States  by  Decades,  1820  to  19 10' 


Total  Number  or 
Immigrants 

Per  Cent  from 

Year  Ending 
June  30 

Northern 

and  Western 

Europe 

Southern 

and  Eastern 

Europe 

Other  Specified 
Countries 

1820— iS'Jo 

151,824 
599,125 

1,713,251 
2,598,214 
2,314,824 
2,812,191 
5,246,613 
3,687,564 
8,795,386 

87.0 
92.5 
95-9 
94.6 
88.5 

73-7 
72.0 
44.8 
21.8 

2.9 
I.I 

•3 

.8 

i-S 

7-1 
18.3 
52.8 
71.9 

10. 1 

iS'^i— 184.0 

6-5 

184.1— iSi^o 

3-8 

i8';i-i86o 

4-5 
10. 1 

1861-1870 

1871-1880 

10. 2 

1881-1800 

9-7 

2.5 

i8qI— IQOO 

lOOI— lOIO 

6.3 

aliens  dying  here.  These,  with  the  aged  and  temperamentally  unfit, 
make  up  a  large  part  of  the  aliens  who  return  to  their  former  homes 
to  remain. 

The  old  immigration  came  to  the  United  States  during  a  period  of 
general  development  and  was  an  important  factor  in  that  develop- 
ment, while  the  new  immigration  has  come  during  a  period  of  great 
industrial  expansion  and  has  furnished  a  practically  unlimited  supply 
of  labor  to  that  expansion. 

As  a  class  the  new  immigrants  are  largely  unskilled  laborers  coming 
from  countries  where  their  highest  wage  is  small  compared  with  the 
lowest  wage  in  the  United  States.  Nearly  75  per  cent  of  them  are 
males.  About  83  per  cent  are  between  the  ages  of  14  and  45  years, 
and  consequently  are  producers  rather  than  dependents.  They  bring 
little  money  into  the  country  and  send  or  take  a  considerable  part  of 
their  earnings  out.    More  than  35  per  cent  are  illiterate,  as  compared 

'  Adapted  from  data  in  Reports  of  the  Immigration  Commission  (191 1),  IV,  16. 


I40  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

with  less  than  3  per  cent  of  the  old  immigrant  class.  Immigration 
prior  to  1882  was  practically  unregulated,  and  consequently  many 
were  not  self-supporting,  so  that  the  care  of  alien  paupers  in  several 
states  was  a  serious  problem.  The  new  immigration  has  for  the  most 
part  been  carefully  regulated  so  far  as  health  and  likelihood  of  pauper- 
ism are  concerned,  and,  although  drawn  from  classes  low  in  the 
economic  scale,  the  new  immigrants  as  a  rule  are  the  strongest,  the 
most  enterprising,  and  the  best  of  their  class. 

35.   CAUSES  OF  EMIGRATION' 

The  present  movement  of  population  from  Europe  to  the  United 
States  is,  \\ith  few  exceptions,  almost  entirely  attributable  to  economic 
causes.  Emigration  due  to  political  reasons  and,  to  a  less  extent, 
religious  oppression,  undoubtedly  exists,  but  even  in  countries  where 
these  incentives  prevail  the  more  important  cause  is  very  largely  an 
economic  one.  This  does  not  mean,  however,  that  emigration  from 
Europe  is  now  an  economic  necessity.  At  times  in  the  past,  notably 
during  the  famine  years  in  Ireland,  actual  want  forced  a  choice 
between  emigration  and  Hteral  starvation,  but  the  present  movement 
results  in  the  main  from  a  widespread  desire  for  better  economic  con- 
ditions rather  than  from  the  necessity  of  escaping  intolerable  ones. 
In  other  words,  the  emigrant  of  today  comes  to  the  United  States  not 
merely  to  make  a  living,  but  to  make  a  better  living  than  is  possible 
at  home. 

The  purely  economic  condition  of  the  wage-worker  is  generally 
very  much  lower  in  Europe  than  in  the  United  States.  This  is  espe- 
cially true  of  the  unskilled  laborer  class  from  which  so  great  a  propor- 
tion of  the  emigration  to  the  United  States  is  drawn.  Skilled  labor 
also  is  poorly  [)aid  when  compared  with  returns  for  like  service  in  the 
United  States,  but  the  opportunity  for  continual  employment  in  this 
field  is  usually  good  and  the  wages  sufficiently  high  to  lessen  the 
necessity  of  emigration.  A  large  proportion  of  the  emigration  from 
southern  and  eastern  Europe  may  be  traced  directly  to  the  inability 
of  the  peasantry  to  gain  an  adequate  liveUhood  in  agricultural  pur- 
suits either  as  laborers  or  proprietors.  Agricultural  labor  is  paid 
extremely  low  w^ages,  and  employment  is  quite  Ukely  to  be  seasonal 
rather  than  continuous.  In  cases  where  peasant  proprietorship  is 
possible,  the  land  holdings  are  usually  so  small,  the  methods  of  culti- 

'  Adapted  from  Rei>orts  of  the  Immigration  Commission  (1911),  IV,  53-62 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS 


141 


vation  so  primitive,  and  the  taxes  so  high,  that  even  in  productive 
years  the  struggle  for  existence  is  a  hard  one,  while  a  crop  failure  means 
practical  disaster  for  the  small  farmer  and  farm  laborer  alike.     In 
agrarian  Russia,  where  the  people  have  not  learned  to  emigrate,  a 
crop  failure  results  in  a  famine,  while  in  other  sections  of  southern 
and  eastern  Europe  it  results  in  emigration,  usually  to  the  United 
States.     Periods  of  industrial  depression  as  well  as  crop  failures  stimu- 
late emigration,  but  the  eflfect  of  the  former  is  not  so  pronounced,  for 
the  reason  that  disturbed  financial  and  industrial  conditions  in  Europe 
are  usually  coincidental  with  like  conditions  in  the  United  States,  and 
at  such  times  the  emigration  movement  is  always  relatively  smaller. 
The  fragmentary  nature  of  available  data  relative  to  wages  in 
many  European  countries  makes  a  satisfactory  comparison  with  wages 
in  the  United  States  impossible.     Unfortunately,  too,  these  data  are 
missing  for  countries  which  are  now  the  chief  sources  of  European 
emigration  to  the  United  States.     It  is  possible,  however,  to  show  the 
relative  wages  and  hours  of  labor  at  a  comparatively  recent  date  in 
some  leading  occupations  in  the  United  States,  Great  Britain,  Ger- 
many, and  France,  and  as  the  economic  status  of  wage-workers  is 
much  higher  in  the  three  latter  countries  than  in  southern  and  eastern 
European  countries  the  approximate  dift'erence  between  wages  in 
such  countries  and  in  the  United  States  may  be  inferred. 


Wages  and  Hours  or  Labor  in  Leading  Occupations  in  the  United  States, 
Great  Britain,  Germany,  and  France,  1903 

(Compiled  from  Bulletin  of  the  United  States  Bureau  of  Labor,  No.  54,  pp. 
H20-1125.) 


0CX;UPATI0N 


Blacksmiths.  . 
Boiler  makers, 
Bricklayers.  . 
Carpenters.  .  , 
Compositors . 
Hod  carriers. 
Iron  molders. 
Laborers.  .  .  . 
Machinists. . 
Painters.  . .  .  , 
Plumbers.  .  . . 
Stonecutters. 
Stonemasons . 


Wages  per  Hour  in — 


United 
States 


$0 


30 
28 

55 
36 

45 
29 

30 
17 

27 

35 
44 
42 
46 


Great 
Britain 


$0.17 

•17 
.21 
.20 
.18 
•13 
•17 
.10 

•17 
.18 
.  20 
.  20 
.21 


Ger- 
many 


^0.12 
.  II 
•13 
•13 
•14 
.08 


.08 
•13 

.12 
.II 

.12 

•13 


France 


16 
15 
13 
15 
13 
10 

13 
10 

13 
13 
15 
14 
14 


Hours  per  Week  in — 


United 
States 


56.56 
56-24 
47.83 
49.46 
49.81 
47.98 
56.80 
56.29 
56.  12 
48.89 
48.91 
48.67 

49  54 


Great 
Britain 


53.67 
5367 
51.83 
50-17 
50.00 

51-83 

53  67 
52-50 
53  67 
51 .00 

49.17 
50.17 
50.17 


Ger 
many 


France 


60.19 
60.00 
56.50 
55  30 
51.08 
59-50 


56.36 
60.00 
56.25 
56.68 
54.00 
56.50 


60. 19 
61.50 
63.00 
60.00 
60.00 
63.91 
60.00 
60.00 
61.50 
60.00 
54.00 
60.00 
66.00 


V 


142  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

In  the  above  table  the  figures  for  the  United  States  cover  a  wide 
area,  representing  the  smaller  as  well  as  the  larger  centers  of  industry, 
while  those  for  the  European  countries  were  taken  in  two  or  three  of 
the  larger  centers  of  industry  in  each  country. 

As  before  stated,  there  are  available  but  little  official  data  relative 
to  wages  in  southern  and  southeastern  Europe,  but  it  is  a  well-known 
fact  that  they  are  very  much  lower  there  than  in  Great  Britain,  Ger- 
many, or  France.  The  Commission  found  this  to  be  true  in  the  por- 
tions of  Italy,  Austria-Hungary,  Greece,  Turkey,  Russia,  and  the 
Balkan  States  visited.  In  fact,  it  may  safely  be  stated  that  in  the 
latter  countries  the  average  wage  of  men  engaged  in  common  and 
agricultural  labor  is  less  than  50  cents  per  day,  while  in  some  sections 
it  is  even  much  lower.  It  is  true  that  in  some  countries  agricultural 
laborers  receive  from  employers  certain  concessions  in  the  way  of 
fuel,  food,  etc.,  but  in  cases  of  this  nature  which  came  to  the  attention 
of  the  Commission,  the  value  of  the  concessions  was  insufficient  to 
affect  materially  the  low  wage  scale. 

It  is  a  common  but  erroneous  belief  that  peasants  and  artisans  in 
the  European  countries  from  which  the  new  immigrant  comes  can 
live  so  very  cheaply  that  the  low  wages  have  practically  as  great  a 
purchasing  power  as  the  higher  wages  in  the  United  States,  The  low 
cost  of  living  among  the  working  people,  especially  of  southern  and 
eastern  Europe,  is  due  to  a  low  standard  of  living  rather  than  to  the 
cheapness  of  food  and  other  commodities.  As  a  matter  of  fact,  meat 
and  other  costly  articles  of  food,  which  are  considered  as  almost 
essential  to  the  everyday  table  of  the  American  workingman,  cannot 
be  afforded  among  laborers  in  like  occupations  in  southern  and  east- 
ern Europe. 

Notwithstanding  the  bad  economic  conditions  surrounding  the 
classes  which  furnish  so  great  a  part  of  the  emigration  from  southern 
and  eastern  Europe,  the  Commission  believes  that  a  laudable  ambi- 
tion for  better  things  than  they  possess  rather  than  a  need  for  actual 
necessities  is  the  chief  motive  behind  the  movement  to  the  United 
States.  Knowledge  of  conditions  in  America,  promulgated  through 
letters  from  friends  or  by  emigrants  who  have  returned  for  a  visit  to 
their  native  villages,  creates  and  fosters  among  the  people  a  desire  for 
improved  conditions  which,  it  is  believed, .  can  be  attained  only 
through  emigration.  Unfortunately,  but  inevitably,  the  returned 
emigrant,  in  a  spirit  of  braggadocio,  is  inclined  to  exaggerate  his  eco- 
nomic achievements  in  America.     In  consequence,  some  whose  emi- 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  143 

gration  is  influenced  by  these  highly  colored  statements,  accompanied 
perhaps  by  a  display  of  what  to  them  seems  great  wealth,  are  doomed 
to  disappointment.  The  latter,  however,  naturally  hesitate  to  admit 
their  failures,  and  consequently  there  is  little  to  disturb  the  belief 
prevailing  in  southern  and  eastern  Europe  that  success  awaits  all  who 
are  able  to  emigrate  to  the  United  States. 

It  is  entirely  safe  to  assert  that  letters  from  persons  who  have 
emigrated  to  friends  at  home,  have  been  the  immediate  cause  of  by 
far  the  greater  part  of  the  remarkable  movement  from  southern  and 
eastern  Europe  to  the  United  States  during  the  past  twenty-five  years. 
There  is  hardly  a  village  or  community  in  southern  Italy  and  Sicily 
that  has  not  contributed  a  portion  of  its  population  to  swell  the  tide 
of  emigration  to  the  United  States,  and  the  same  is  true  of  large  areas 
of  Austria,  Hungary,  Greece,  Turkey,  and  the  Balkan  States.  There 
is  a  tendency  on  the  part  of  emigrants  from  these  countries  to  retain 
an  interest  in  the  homeland,  and  in  consequence  a  great  amount  of 
correspondence  passes  back  and  forth.  It  was  frequently  stated  to 
members  of  the  Commission  that  letters  from  persons  who  have 
emigrated  to  America  were  passed  from  hand  to  hand  until  most  of 
the  emigrants'  friends  and  neighbors  were  acquainted  with  the  con- 
tents. In  periods  of  industrial  acti\aty,  as  a  rule,  the  letters  so  cir- 
culated contain  optimistic  references  to  wages  and  opportunities  for 
employment  in  the  United  States,  and  when  comparison  in  this  regard 
is  made  with  conditions  at  home  it  is  inevitable  that  whole  com^ 
munities  should  be  inoculated  with  a  desire  to  emigrate.  The  reverse 
is  true  during  seasons  of  industrial  depression  in  the  United  States. 
At  such  times  intending  emigrants  are  quickly  informed  by  their 
friends  in  the  United  States  relative  to  conditions  of  employment, 
and  a  great  falling  off  in  the  tide  of  emigration  is  the  immediate  result. 

Emigrants  who  have  returned  for  a  visit  to  their  native  land  are 
also  great  promoters  of  emigration.  This  is  particularly  true  of 
southern  and  eastern  European  emigrants,  who  as  a  class  make  more 
or  less  frequent  visits  to  their  old  homes.  Among  the  returning 
emigrants  are  always  some  who  have  failed  to  achieve  success  in 
America,  and  some  who  through  changed  conditions  of  Ufe  and 
employment  return  in  broken  health.  It  is  but  natural  that  these 
should  have  a  slightly  deterrent  effect  on  emigration,  but,  on  the 
whole,  this  is  relatively  unimportant,  for  the  returning  emigrant,  as 
a  rule,  is  one  who  has  succeeded  and,  as  before  stated,  is  inclined  to 
exaggerate  rather  than  minimize  his  achievements  in  the  Unitea 


144  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

States.  In  times  of  industrial  inactivity  in  the  United  States  the  large 
number  of  emigrants  who  return  to  their  native  lands  of  course  serve 
as  a  temporary  check  to  emigration,  but  it  is  certain  that  in  the  long 
run  such  returning  emigrants  actually  promote  rather  than  retard  the 
movement  to  the  United  States. 

Next  to  the  advice  and  assistance  of  friends  and  relatives  who  have 
already  emigrated,  the  propaganda  conducted  by  steamship  ticket 
agents  is  undoubtedly  the  most  important  immediate  cause  of  emi- 
gration from  Europe  to  the  United  States.  This  propaganda  flour- 
ishes in  every  emigrant-furnishing  country  of  Europe,  notwithstanding 
the  fact  that  the  promotion  of  emigration  is  forbidden  by  the  laws  of 
many  such  countries  as  well  as  by  the  United  States  immigration  law. 

No  data  are  available  to  show  even  approximately  the  total  num- 
ber of  such  agents  and  subagents  engaged  in  the  steerage  ticket 
business.  One  authority  stated  to  the  Commission  that  two  of  the 
leading  steamship  lines  had  five  or  six  thousand  ticket  agents  in  Galicia 
alone,  and  that  there  was  "a  great  hunt  for  emigrants"  there.  The 
total  number  of  such  agents  is  undoubtedly  very  large,  for  the  steer- 
age business  is  vastly  important  to  all  the  lines  operating  passenger 
ships,  and  all  compete  for  a  share  of  it.  There  is  at  present  an  agree- 
ment among  the  larger  steamship  companies  which  in  a  measure 
regulates  the  distribution  of  this  trafl5c  and  prevents  unrestricted 
competition  between  the  Hnes,  but  this  does  not  affect  the  vigorous 
and  widespread  hunt  for  steerage  passengers  which  is  carried  on 
throughout  the  chief  emigrant-furnishing  countries. 

36.    THE  PROBLEMS  OF  IMMIGRATION' 

t  The  chief  subjects  of  a  study  of  immigration  may  be  briefly  sum- 

marized as  follows: 

1.  The  effect  of  immigration  upon  the  physical  characteristics  of 
the  American  people  as  shown  by: 

a)  The  health  of  the  immigrant  on  his  arrival  in  this  coimtry, 
and  his  effect  upon  the  health  of  the  community. 

h)  The  effect  of  the  American  environment  upon  the  physical 
characteristics  of  the  immigrant  and  his  children. 

2.  The  effect  of  the  immigrant  upon  the  mental  characteristics  of 
the  American  people,  as  shown  by: 

'  Adapted  from  J.  W.  Jenks  and  W.  J.  Lauck,  The  Immigration  Problem, 
pp.  6-0-     Copyright  by  Funk  &  Wagnalls  Co.,  1912. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  145 

a)  Illiteracy  of  the  various  races  of  immigrants. 

b)  The  relation  of  the  immigrants  to  our  public  schools,  and  the 
effect  of  the  schools  upon  the  children  of  immigrants. 

c)  The  papers,  books,  and  associations  founded  and  supported  by 
the  immigrants. 

d)  The  occupations  of  the  immigrants  that  may  serve  to  indicate 
mental  characteristics. 

3.  The  effect  of  immigration  upon  the  morals  of  the  American 
people,  as  shown  by: 

a)  The  criminal  immigrant.  The  moral  characteristics  of  the 
various  races  may  be  indicated  by  the  number  of  crimes  and  the  char- 
acter of  the  crimes  committed  by  them. 

b)  The  social  evil  and  the  white-slave  traffic,  indicated  in  part  by 
court  records  and  observations  of  social  workers  and  special  investi- 
gators. 

c)  The  immigrant  pauper:  A  study  of  the  immigrants  in  the 
charity  hospitals  and  of  the  relief  given  by  the  charitable  societies 
to  immigrants.* 

4.  The  effect  of  immigration  upon  American  institutions,  as 
shown  by: 

a)  Political  effects,  indicated  by  the  relative  number  of  immigrants 
of  various  races  that  become  naturalized,  and  by  the  methods  employed 
by  political  managers  to  influence  the  votes  of  the  immigrants. 

b)  The  social  effects  as  indicated  by:        ' 

(i)  The  church  affiliations  and  religious  practices  and  customs 
of  the  immigrants  of  different  races. 

(2)  The  immigrant  family,  as  shown  in  part  by  the  marriage  rela- 
tions; the  fecundity  of  immigrant  women,  as  compared  with  American 
women;  and  the  children  of  the  immigrants.  The  tendency  also 
toward  establishing  families  here,  or  leaving  families  in  Eiu^ope,  with 
the  expectation  of  returning  to  them. 

(3)  The  immigrant  colony.  Both  in  our  large  cities  and  in  agri- 
cultural districts,  the  effect  of  immigration  upon  our  institutions  has 
been  profoundly  modified  by  the  frequent  inclination  of  the  immi- 
grants to  form  separate  colonies  which  are  maintained  sometimes  for 
generations. 

(4)  Housing  and  living  conditions.  The  congestion  of  immigrants 
in  certain  sections  of  our  cities  and  industrial  centers,  the  bunk-house 

'  Pauperism  is,  of  course,  to  be  considered  also  in  other  than  its  moral  aspects, 
but  it  is  conveniently  classified  here. 


146  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

or  lodging-house  for  men  without  families  who  do  not  become  per- 
manent residents,  the  ownership  of  homes,  and  similar  matters  which 
aflfect  living  conditions,  are  of  profound  significance  to  society. 

5.  The  effect  of  immigration  upon  the  economic  and  industrial 
conditions  of  the  United  States,  as  shown  by: 

a)  The  occupations  of  the  immigrant  and  of  his  children.  Have 
racial  characteristics  or  the  European  customs  of  the  immigrants  so 
determined  the  occupations  which  they  enter  here  as  to  have  produced 
any  material  modification  of  the  relations  between  agriculture,  manu- 
facturing, mining,  trading,  transportation,  and  other  occupations  ? 

b)  Changes  in  industrial  methods.  Has  the  incoming  of  the 
immigrant  affected  the  use  of  machinery  or  modified  the  form  of  our 
industrial  organization?  How  has  it  affected  the  geographical  dis- 
tribution of  industries  ? 

c)  The  employment  of  women  and  children  as  wage-earners. 

d)  The  displacement  of  American  laborers  or  the  immigrant  wage- 
earners  who  arrived  in  this  country  twenty  years  ago  by  the  recent 
immigrants  from  different  countries. 

e)  Labor  organizations.  Have  the  immigrants  strengthened  or 
weakened  the  labor  organizations,  and  has  the  effect  upon  them  been 
beneficial  or  injurious  to  the  wage-earning  classes  ? 

/)  The  standard  of  living.  At  the  base  of  every  civilization  stand 
the  ideals  of  the  people  and  their  standards  of  living.  The  standard 
of  living  has  so  profound  an  influence  upon  the  probability  of  the 
attainment  of  many  ideals  that  it  is  to  be  considered  possibly  the 
most  fundamental  factor  in  determining  the  quality  of  the  covmtry's 
civilization.  While  one  may  well  agree  with  James  Russell  Lowell, 
that  "material  success  is  good,  but  only  as  the  necessary  preliminary 
to  better  things,"  it  is  impossible  to  deny  the  fact  that  material 
success  is  often,  if  not  always,  a  preliminary  that  is  absolutely  neces- 
sary to  better  things,  so  far  as  the  question  concerns  development  of 
mental  characteristics,  and  perhaps  also  the  modification  of  moral 
and  social  institutions. 

37.   IMMIGRATION  AND  THE  BIRTH-RATE' 

About  1830,  however,  we  reach  a  turning-point  in  the  history  of 
our   population.     In   the   decade    1830-40   the   number   of   foreign 

'Adapted  from  Francis  A.  Walker,  "Immigration  and  Degradation,"  in 
Discussions  in  Economics  and  Statistics,  Vol.  II,  pp.  421-26.  Henry  Holt  &  Co., 
1899. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  147 

arrivals  greatly  increased.  Immigration  had  not,  indeed,  reached 
the  enormous  dimensions  of  these  later  days.  Yet,  during  the  decade 
in  question,  the  foreigners  coming  to  the  United  States  were  almost 
exactly  fourfold  those  coming  in  the  decade  preceding,  or  599,000. 
The  question  now  of  vital  importance  is  this:  Was  the  population  of 
the  country  correspondingly  increased?  I  answer,  No!  The  popu- 
lation of  1840  was  almost  exactly  what,  by  computation,  it  would 
have  been  had  no  increase  in  foreign  arrivals  taken  place.  Again, 
between  1840  and  1850,  a  still  further  access  of  foreigners  occurred, 
this  time  of  enormous  dimensions,  the  arrivals  of  the  decade  amount- 
ing to  not  less  than  1,713,000.  Of  this  gigantic  total,  1,048,000  were 
from  the  British  Isles,  the  Irish  famine  of  1846-47  having  driven 
hundreds  of  thousands  of  miserable  peasants  to  seek  food  upon  our 
shores.  Again  we  ask:  Did  this  excess  constitute  a  net  gain  to  the 
population  of  the  country?  Again  the  answer  is,  No!  Population 
showed  no  increase  over  the  proportions  established  before  immigra- 
tion set  in  like  a  flood.  In  other  words,  as  the  foreigners  began  to 
come  in  larger  numbers,  the  native  population  more  and  more  with- 
held their  own  increase. 

Now,  this  correspondence  might  be  accounted  for  in  three  differ- 
ent ways:  (i)  It  might  be  said  that  it  was  a  mere  coincidence,  no 
relation  of  cause  and  effect  existing  between  the  two  phenomena. 
(2)  It  might  be  said  that  the  foreigners  came  because  the  native  popu- 
lation was  relatively  declining,  that  is,  failing  to  keep  up  its  pristine 
rate  of  increase.  (3)  It  might  be  said  that  the  growth  of  the  native 
population  was  checked  by  the  incoming  of  the  foreign  elements  in 
such  large  numbers. 

The  true  explanation  of  the  remarkable  fact  we  are  considering, 
I  believe  to  be  the  last  of  the  three  suggested.  The  access  of  foreigners, 
at  the  time  and  under  the  circumstances,  constituted  a  shock  to  the 
principle  of  population  among  the  native  element.  That  principle 
is  always  acutely  sensitive,  alike  to  sentimental  and  to  economic 
conditions.  And  it  is  to  be  noted,  in  passing,  that  not  only  did  the 
decline  in  the  native  element,  as  a  whole,  take  place  in  singular  corre- 
spondence with  the  excess  of  foreign  arrivals,  but  it  occurred  chiefly 
in  just  those  regions  to  which  the  newcomers  most  freely  resorted. 

But  what  possible  reason  can  be  suggested  why  the  incoming 
of  the  foreigner  should  have  checked  the  disposition  of  the  native 
toward  the  increase  of  population  at  the  traditional  rate  ?  I  answer 
that  the  best  of  good  reasons  can  be  assigned.     Throughout  the 


148  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

northeastern  and  northern  middle  states,  into  which,  during  the 
period  under  consideration,  the  newcomers  poured  in  such  numbers, 
the  standard  of  material  living,  of  general  intelligence,  of  social 
decency,  had  been  singularly  high.  Life,  even  at  its  hardest,  had 
always  had  its  luxuries;  the  babe  had  been  a  thing  of  beauty,  to  be 
delicately  nurtured  and  proudly  exhibited;  the  growing  child  had 
been  decently  dressed,  at  least  for  school  and  church;  the  house  had 
been  kept  in  order,  at  whatever  cost,  the  gate  hung,  the  shutters  in 
place,  while  the  front  yard  had  been  made  to  bloom  with  simple 
flowers;  the  village  church,  the  public  schoolhouse,  had  been  the  best 
which  the  community,  with  great  exertions  and  sacrifices,  could  erect 
and  maintain.  Then  came  the  foreigner,  making  his  way  into  the 
little  village,  bringing — small  blame  to  him ! — not  only  a  vastly  lower 
standard  of  living,  but  too  often  an  actual  present  incapacity  even  to 
understand  the  refinements  of  life  and  thought  in  the  community 
in  which  he  sought  a  home.  Our  people  had  to  look  upon  houses  that 
were  mere  shells  for  human  habitations,  the  gate  unhung,  the  shutters 
flapping  or  falling,  green  pools  in  the  yard,  babes  and  young  children 
rolling  about  half  naked  or  worse,  neglected,  dirty,  unkempt.  Was 
there  not  in  this  a  sentimental  reason  strong  enough  to  give  a  shock 
to  the  principle  of  population  ?  But  there  was,  besides,  an  economic 
reason  for  a  check  to  the  native  increase.  The  American  shrank  from 
the  industrial  competition  thus  thrust  upon  him.  He  was  unwilling 
himself  to  engage  in  the  lowest  kind  of  day-labor  with  these  new  ele- 
ments of  the  population;  he  was  even  more  unwilling  to  bring  sons 
and  daughters  into  the  world  to  enter  into  that  competition.  For 
the  first  time  in  our  history,  the  people  of  the  free  states  became 
divided  into  classes.  Those  classes  were  natives  and  foreigners. 
Politically,  the  distinction  had  only  a  certain  force,  which  yielded  more 
or  less  readily  under  partisan  pressure;  but  socially  and  industrially 
that  distinction  has  been  a  tremendous  power,  and  its  chief  effects 
have  been  wrought  upon  population. 

If  the  foregoing  views  are  true,  or  contain  any  considerable  degree 
of  truth,  foreign  immigration  into  this  country  has,  from  the  time  it 
first  assumed  large  proportions,  amounted,  not  to  a  re-enforcement 
of  our  population,  but  to  a  replacement  of  native  by  foreign  stock. 
That  if  the  foreigners  had  not  come,  the  native  element  would  long 
have  filled  the  places  the  foreigners  usurped,  I  entertain  not  a  doubt. 
The  competency  of  the  American  stock  to  do  this  would  be  absurd  to 
question,  in  the  face  of  such  a  record  as  that  for  1790  to  1830. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS 


149 


Whatever  were  the  causes  which  checked  the  growth  of  the  native 
population,  they  were  neither  physiological  nor  climatic.  They  were 
mainly  social  and  economic;  and  chief  among  them  was  the  access  of 
vast  hordes  of  foreign  immigrants,  bringing  with  them  a  standard  of 
living  at  which  our  own  people  revolted. 


58.  FECUNDITY  OF  NATIVE  AND  IMMIGRANT  WOMEN  IN 

RHODE  ISLAND,  1900' 

All  data  are  for  women  under  45  years  of  age,  married  ten  to  twenty  years 


Nationality  (as  Determined  by 

Country  of  Birth  of 

Both  Parents) 


All  classes 

Native  white  of  native  parentage. 


White  of  foreign  parentage 

First  generation  (born  abroad)  . . 
Second  generation  (born  in  U.S.) 


Canadian,  English.  .  , 
First  generation .  .  . 
Second  generation . 


Canadian,  French .  .  . 
First  generation .  .  . 
Second  generation . 


English 

First  generation .  .  , 
Second  generation . 


German 

First  generation . . . 
Second  generation . 


Irish 

First  generation . . 
Second  generation . 


Italian 

First  generation . . , 
Second  generation . 


Scotch 

First  generation  .  . 
Second  generation . 


Swedish 

First  generation .  . . 
Second  generation . 


Other  foreign .  ._ 

First  generation .  .  , 
Second  generation. 


Native  negro. 


Percentage  of  Women  Bearing 


No 
Children 


11.3 
I7-S 

8.0 

7.i 

lO-S 

9.2 

g   I 

10.4 


14.6 

10.4 

9-S 

12.0 

8.8 

7.6 

10.3 

S-i 
51 
(o) 

10. 1 

8.9 

IS. 6 

7.0 
7-1 
(a) 

7-3 

7.0 

16.7 

22. s 


1  or  2 
Children 


26.1 
41.2 

18.9 

17.2 

23.9 

26.8 
25.3 
37.3 

II. 3 
10.2 
17-3 

30.0 
27.8 
39-4 

26.8 
19.6 
39.0 

IS-S 
13.0 
18.7 

10. s 
10.6 
(a) 

27.6 

233 
46.7 

21.8 
21 .9 
(a) 

20.7 
20.3 
30.0 

26.2 


3  tos 
Children 


35 -7 
32-3 


37.7 
37.8 
37.6 

38.9 
40.4 
28.4 

29  3 

28. 3 
34.8 

40.0 
40.7 
370 


43 

46, 

38. 

38, 

37 

38 


43 -S 
43- 6 
(a) 

38.9 
41 .6 

26.7 

46.0 
46.0 
(a) 

41-3 
41-7 
30.0 

25.0 


More  than 
S  Children 


26.9 
9.2 


35-4 
37.8 
28.1 

25  I 
25-3 
24.0 

54-2 
56.3 
42.8 

20.  a 

22.7 

9.0 


19 
24. 
10. 


37-7 
42.1 
32.0 

40.8 
40.8 
(a) 

23-5 
26.2 
II. I 

25.1 
25.0 
(a) 

30.8 
311 

23 -4 

26.5 


Average 

Number  of 

Children 

Born  per 

Woman 


3.8 

2.5 


4.5 
4-7 
3-9 

3.8 
3.9 
3-4 

5-7 
5.9 
4-9 

3-5 
3-7 
a. 6 

35 
3-9 
3.8 

4.6 
4.8 
4.2 

5.0 
5.0 
(«) 

3.6 
3-9 

2.4 

4.0 
3-9 
(o) 

4-2 
4.2 
3.3 

3.3 


(o)  Not  computed  owing  to  small  number  involved. 

•Adapted  from   Reports  of  the   Immigration  Commission  (191 1),  XXVIII, 
743-48. 


150  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

39.     IMMIGRATION  AND  THE  USE  OF  MACHINERY' 

The  remarkable  development  of  machinery  and  division  of  labor 
in  the  United  States  has  been  coincident  with  the  enormous  immigra- 
tion of  foreign  laborers.  There  is  a  close  relationship  between  the 
two  movements.  In  the  first  place,  from  the  earliest  beginnings  of 
modern  industry  both  skilled  and  unskilled  laborers  in  England  and 
America  have  implicitly  argued  that  these  mechanical  innovations, 
which  before  their  very  eyes  both  substituted  unskilled  for  skilled 
labor  and  displaced  both  kinds  of  labor,  were  hostile  to  their  interests. 
Where,  as  in  England,  it  has  been  possible  for  labor  to  organize,  or 
where,  as  in  England  and  Germany,  without  effective  organization, 
there  have  been  long  accepted  traditions  and  customary  lethargic 
methods  of  doing  work,  the  introduction  of  machinery  and  division 
of  labor  have  been  seriously  checked.  But  in  America,  with  its 
mixed  races,  there  has  of  late  years  been  neither  organization  nor 
tradition,  or,  rather,  obstacles  imposed  by  tradition  and  organization 
have  been  easily  broken  down.  The  same  is  true  in  England  itself 
in  those  few  trades  where  the  immigrant  has  entered,  as  in  the 
clothing  trade.  It  was  the  Russian  Jew  who,  in  that  country,  intro- 
duced the  sewing  machine  and  the  minute  subdivision  of  labor  in  the 
face  of  the  English  journeyman  tailor,  who  despised  these  innovations 
as  destructive  to  his  trade  skill.  In  America  this  process  has  been 
nearly  universal  in  all  trades,  and  the  high  degree  of  machine  industry 
in  this  country,  with  its  low  cost  of  production  and  large  growing 
exports,  may  almost  be  said  to  be  a  direct  effect  of  immigration. 
The  industrial  menace  to  Europe  from  American  manufactures  is 
very  largely  the  work  of  the  European  immigrant  himself  removed 
to  America.  Not  that  the  immigrant  has  been  prominent  as  an 
inventor  and  organizer  of  machine  production,  but  that  he  has 
removed  all  obstacles  to  its  free  and  rapid  introduction,  and  so  has 
stimulated  invention  and  business  organization.  The  minute  sub- 
division of  labor  in  the  sewing  trade,  has  indeed  been  devised  in  order 
to  put  the  hordes  of  unskilled  immigrants  easily  to  work,  and  they 
have  created  for  themselves  practically  a  new  industry,  that  of  ready- 
made  clothing  for  the  country  at  large,  alongside  that  of  the  journey- 
man tailor,  who  continues  his  traditional  methods  of  work  for  the 
more  expensive  custom  garments.     In   other   trades,   likewise,   the 

'From  John   R.  Commons,    'Immigration   and   Its  Economic  Effects,"  in 
the  Report  of  the  Industrial  Commission  (igoi),  XV,  313-14. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  151 

objections  of  the  old-time  trade  unions  to  the  introduction  of  ma- 
chinery or  to  its  rapid  speeding  have  been  nuUified  by  competing 
estabUshments  springing  up  and  entering  the  race  with  him  on  the 
basis  of  machinery  and  immigrant  labor.  Ultimately  he,  too,  has 
been  compelled  to  accept  the  innovations  or  lose  his  job.  The  last 
few  years  have  seen  a  number  of  unions,  like  the  glass  blowers  and 
the  iron  and  steel  workers,  formally  remove  through  their  national 
conventions  several,  if  not  all,  their  restrictions  on  machinery, 
business  management,  and  speeding  of  work. 

In  the  second  place,  the  fact  that  machinery  and  division  of  labor 
open  a  place  for  unskilled  immigrants,  makes  it  possible  not  only  to  get 
the  advantages  of  machinery,  but  also  to  get  the  advantages  of  cheap 
labor.  If  machinery  were  to  be  considered  as  strictly  an  economic 
force,  then  the  labor  employed  to  operate  the  machinery  should 
receive  the  same  wages  as  the  skilled  labor  which  it  displaces.  The 
economy  would  show  itself  in  the  greatly  increased  output.  This  has 
been  the  actual  outcome  in  the  case  of  the  printers  who,  omng  to 
their  strong  organization  and  their  natural  protection  against  immi- 
gration in  the  fact  of  the  English  language,  receive  even  better  wages 
on  the  typesetting  machine  than  they  formerly  received  in  setting 
t>'pe  by  hand,  and,  at  the  same  time,  the  cost  of  the  work  has  been 
greatly  reduced.  But  if,  on  the  other  hand,  the  new  machinery  is 
used  to  displace  well-paid  labor  by  ill-paid  labor,  it  is  a  means  of 
increasing  permanently  the  proportion  of  low  standard  population 
in  our  midst.  This  result  in  past  years  has,  in  many  cases,  accom- 
panied immigration.  It  is  shown  in  the  cotton  textile  industry, 
where,  with  the  chronic  revolution  in  machinery,  there  has  been  found 
a  place  for  continuous  succession  of  lower  and  lower  standards  of 
living,  following  in  order  the  native  American,  the  Irish,  the  French 
Canadian,  the  Armenian,  and  the  Syrian.  The  fate  of  the  higher  dis- 
placed classes  and  their  ability  to  make  the  transition  to  other  indus- 
tries depends  upon  the  expansion  of  industry  and  the  restriction  on 
the  growth  of  their  numbers.  While,  therefore,  immigration  has 
furnished  a  field  for  the  rapid  expansion  of  machinery,  it  has  permitted 
that  machinery  to  be  used  as  a  refuge  for  the  low-standard  population. 
Whether  this  population  in  course  of  time  is  itself  able  to  rise  in  the 
scale  is  a  problem.  Hitherto  organization  has  been  able  to  do  but 
little  for  those  industries  where  automatic  machinery  and  division  of 
labor  have  displaced  skilled  labor  by  unskilled  labor.  This  is  partly 
owing  to  another  factor — the  introduction  of  women  and  children. 


15*  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

40.    THE  RECOMMENDATIONS  OF  THE  IMMIGRATION 

COMMISSION' 

As  a  result  of  the  investigation,  the  Commission  is  unanimously 
of  the  opinion  that  in  framing  legislation  emphasis  should  be  laid 
upon  the  following  principles: 

1.  While  the  American  people,  as  in  the  past,  welcome  the 
oppressed  of  other  lands,  care  should  be  taken  that  immigration  be 
such  both  in  quality  and  quantity  as  not  to  make  too  difficult  the 
process  of  assimilation. 

2.  Since  the  existing  law  and  further  special  legislation  recom- 
mended in  this  report  deal  ^ith  the  physically  and  morally  unfit, 
further  general  legislation  concerning  the  admission  of  aliens  should 
be  based  primarily  upon  economic  or  business  considerations  touching 
the  prosperity  and  economic  well-being  of  our  people. 

3.  The  measure  of  the  rational,  healthy  development  of  a  country 
is  not  the  extent  of  its  investment  of  capital,  its  output  of  products, 
or  its  exports  and  imports,  unless  there  is  a  corresponding  economic 
opportunity  afforded  to  the  citizen  dependent  upon  employment 
for  his  material,  mental,  and  moral  development. 

4.  The  development  of  business  may  be  brought  about  by  means 
which  lower  the  standard  of  living  of  the  wage-earners.  A  slo\f 
expansion  of  industry  which  would  permit  the  adaptation  and  assimi- 
lation of  the  incoming  labor  supply  is  preferable  to  a  very  rapid 
industrial  expansion  which  results  in  the  immigration  of  laborers  of 
low  standards  and  efficiency,  who  imperil  the  American  standard 
of  wages  and  conditions  of  employment. 

The  Commission  agrees  that: 

I.  To  protect  the  United  States  more  effectively  against  the 
immigration  of  criminal  and  certain  other  debarred  classes — 

a)  Aliens  convicted  of  serious  crimes  within  a  period  of  five  years 
after  admission  should  be  deported  in  accordance  with  the  provisions 
of  House  bill  20980,  Sixty-first  Congress,  second  session. 

b)  Under  the  provisions  of  section  39  of  the  immigration  act  of 
February  20,  1907,  the  President  should  appoint  commissioners  to 
make  arrangements  with  such  countries  as  have  adequate  police 
records  to  supply  emigrants  with  copies  of  such  records,  and  that 
thereafter  immigrants  from  such  countries  should  be  admitted  to 
the  United  States  only  upon  the  production  of  proper  certificates 
showing  an  absence  of  convictions  for  excludable  crimes. 

■  Reports  of  the  Immigration  Commission  (ign),  I,  45-48. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  153 

c)  So  far  as  practicable  the  immigration  laws  should  be  so 
amended  as  to  be  made  applicable  to  alien  seamen. 

d)  Any  alien  who  becomes  a  public  charge  within  three  years 
after  his  arrival  in  this  country  should  be  subject  to  deportation  in 
the  discretion  of  the  Secretary  of  Commerce  and  Labor. 

2.  Sufficient  appropriation  should  be  regularly  made  to  enforce 
vigorously  the  provisions  of  the  laws  previously  recommended  by 
the  Commission  and  enacted  by  Congress  regarding  the  importation 
of  women  for  immoral  purposes. 

3.  As  the  new  statute  relative  to  steerage  conditions  took  effect 
so  recently  as  January  i,  1909,  and  as  the  most  modern  steerage  fully 
complies  with  all  that  is  demanded  under  the  law,  the  Commission's 
only  recommendation  in  this  connection  is  that  a  statute  be  imme- 
diately enacted  providing  for  the  placing  of  government  officials, 
both  men  and  women,  on  vessels  carrying  third-class  or  steerage 
passengers  for  the  enforcement  of  the  law  and  the  protection  of  the 
immigrant.  The  system  inaugurated  by  the  Commission  of  sending 
investigators  in  the  steerage  in  the  guise  of  immigrants  should  be 
continued  at  intervals  by  the  Bureau  of  Immigration. 

4.  To  strengthen  the  certainty  of  just  and  humane  decisions  of 
doubtful  cases  at  ports  of  entry  it  is  recommended — 

That  section  25  of  the  immigration  act  of  1907  be  amended  to 
provide  that  boards  of  special  inquiry  should  be  appointed  by  the 
Secretary  of  Commerce  and  Labor,  and  that  they  should  be  com- 
posed of  men  whose  ability  and  training  qualify  them  for  the  per- 
formance of  judicial  functions;  that  the  provisions  compelling  their 
hearings  to  be  separate  and  apart  from  the  public  should  be  repealed, 
and  that  the  office  of  an  additional  Assistant  Secretary  of  Commerce 
and  Labor  to  assist  in  reviewing  such  appeals  be  created. 

5.  To  protect  the  immigrant  against  exploitation;  to  discourage 
sending  savings  abroad;  to  encourage  permanent  residence  and 
naturalization;  and  to  secure  better  distribution  of  alien  immigrants 
throughout  the  country — 

a)  The  states  should  enact  laws  strictly  regulating  immigrant 
banks. 

b)  Proper  state  legislation  should  be  enacted  for  the  regulation 
of  employment  agencies. 

c)  Since  numerous  aliens  make  it  their  business  to  keep  immi- 
grants from  influences  that  may  tend  toward  their  assimilation  and 
naturalization  as  American  citizens  with  the  purpose  of  using  their 


154  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

funds,  of  encouraging  investment  of  their  savings  abroad,  and  their 
return  to  their  home  land,  aliens  who  attempt  to  persuade  immi- 
grants not  to  become  American  citizens  should  be  made  subject  to 
deportation. 

d)  Since  the  distribution  of  the  thrifty  immigrant  to  sections  of 
the  country  where  he  may  secure  a  permanent  residence  to  the  best 
advantage,  and  especially  where  he  may  invest  his  savings  in  farms 
or  engage  in  agricultural  pursuits,  is  most  desirable,  the  division  of 
information  should  be  so  conducted  as  to  co-operate  with  states 
desiring  immigrant  settlers;  and  information  concerning  the  oppor- 
tunities for  settlement  should  be  brought  to  the  attention  of  immi- 
grants in  industrial  centers  who  have  been  here  for  some  time  and 
who  might  be  thus  induced  to  invest  their  savings  in  this  country 
and  become  permanent  agricultural  settlers.  The  division  might 
also  secure  and  furnish  to  all  laborers  alike  information  showing 
opportunities  for  permanent  employment  in  various  sections  of  the 
country,  together  with  the  economic  conditions  in  such  places. 

6.  One  of  the  provisions  of  section  2  of  the  act  of  1907  reads  as 
follows: 

And  provided  further,  That  skilled  labor  may  be  imported  if  labor 
of  like  kind  unemployed  can  not  be  found  in  this  country. 

Instances  occasionally  arise,  especially  in  the  establishment  of 
new  industries  in  the  United  States,  where  labor  of  the  kind  desired, 
unemployed,  cannot  be  found  in  this  country  and  it  becomes  necessary 
to  import  such  labor.  Under  the  law  the  Secretary  of  Commerce 
and  Labor  has  no  authority  to  determine  the  questions  of  the  neces- 
sity for  importing  such  labor  in  advance  of  the  importation,  and  it 
is  recommended  that  an  amendment  to  the  law  be  adopted  by  adding 
to  the  clause  cited  above  a  provision  to  the  effect  that  the  question 
of  the  necessity  of  importing  such  skilled  labor  in  any  particular 
instance  may  be  determined  by  the  Secretary  of  Commerce  and 
Labor  upon  the  application  of  any  person  interested  prior  to  any 
action  in  that  direction  by  such  person;  such  determination  by  the 
Secretary  of  Commerce  and  Labor  to  be  reached  after  a  full  hearing 
and  an  investigation  into  the  facts  of  the  case. 

7.  The  general  policy  adopted  by  Congress  in  1882  of  excludhig 
Chinese  laborers  should  be  continued. 

The  question  of  Japanese  and  Korean  immigration  should  be 
permitted  to  stand  without  further  legislation  so  long  as  the  present 
method  of  restriction  proves  to  be  effective. 


HUMAN  BEINGS  AS  ECONOMIC  FACTORS  155 

An  understanding  should  be  reached  with  the  British  Govern- 
ment whereby  East  Indian  laborers  should  be  effectively  prevented 
from  coming  to  the  United  States. 

8.  The  investigations  of  the  Commission  show  an  oversupply 
of  unskilled  labor  in  basic  industries  to  an  extent  which  indicates  an 
oversupply  of  unskilled  labor  in  the  industries  of  the  country  as  a 
whole,  and  therefore  demand  legislation  which  will  at  the  present 
time  restrict  the  further  admission  of  such  unskilled  labor. 

It  is  desirable  in  making  the  restriction  that — 

0)  A  sufficient  number  be  debarred  to  produce  a  marked  effect 
upon  the  present  supply  of  unskilled  labor. 

b)  As  far  as  possible,  the  aliens  excluded  should  be  those  who 
come  to  this  country  with  no  intention  to  become  American  citizens 
or  even  to  maintain  a  permanent  residence  here,  but  merely  to  save 
enough,  by  the  adoption,  if  necessary,  of  low  standards  of  living,  to 
return  permanently  to  their  home  country.  Such  persons  are  usually 
men  unaccompanied  by  wives  or  children. 

c)  As  far  as  possible  the  aliens  excluded  should  also  be  those  who, 
by  reason  of  their  personal  qualities  or  habits,  would  least  readily  be 
assimilated  or  would  make  the  least  desirable  citizens. 

The  following  methods  of  restricting  immigration  have  been 
suggested: 

a)  The  exclusion  of  those  unable  to  read  or  write  in  some 
language. 

b)  The  limitation  of  the  number  of  each  race  arriving  each  year 
to  a  certain  percentage  of  the  average  of  that  race  arriving  during 
a  given  period  of  years. 

c)  The  exclusion  of  unskilled  laborers  unaccompanied  by  wives 
or  families. 

d)  The  limitation  of  the  number  of  immigrants  arriving  annually 
at  any  port. 

e)  The  material  increase  in  the  amount  of  money  required  to  be 
in  the  possession  of  the  immigrant  at  the  port  of  arrival. 

/)  The  material  increase  of  the  head  tax. 

g)  The  levy  of  the  head  tax  so  as  to  make  a  marked  discrimi- 
nation in  favor  of  men  with  families. 

All  these  methods  would  be  effective  in  one  way  or  another  in 
securing  restrictions  in  a  greater  or  less  degree.  A  majority  of  the 
Commission  favor  the  reading  and  writing  test  as  the  most  feasible 
single  method  of  restricting  undesirable  immigration. 


IS6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  Commission  as  a  whole  recommends  restriction  as  demanded 
by  economic,  moral,  and  social  considerations,  furnishes  in  its  report 
reasons  for  such  restriction,  and  points  out  methods  by  which  Congress 
can  attain  the  desired  result  if  its  judgment  coincides  with  that  of 
the  Commission, 


V.     CAPITAL  GOODS  AS  ECONOMIC  FACTORS 

41.    THE  ROUNDABOUT  PROCESS' 

A  peasant  requires  drinking  water.  The  spring  is  some  distance 
from  his  house.  There  are  various  ways  in  which  he  may  supply  his 
daily  wants.  First,  he  may  go  to  the  spring  each  time  he  is  thirsty 
and  drink  out  of  his  hollowed  hand.  This  is  the  most  direct  way; 
satisfaction  follows  immediately  on  exertion.  But  it  is  an  incon- 
venient way,  for  our  peasant  has  to  take  his  way  to  the  well  as  often 
as  he  is  thirsty.  And  it  is  an  insuflScient  way,  for  he  can  never 
collect  and  store  any  great  quantity  such  as  he  requires  for  various 
other  purposes.  Second,  he  may  take  a  log  of  wood,  hollow  it  out  into 
a  kind  of  pail,  and  carry  his  day's  supply  from  the  spring  to  his 
cottage.  The  advantage  is  obvious,  but  it  necessitates  a  roundabout 
way  of  considerable  length.  The  man  must  spend,  perhaps  a  day, 
in  cutting  out  the  pail;  before  doing  so  he  must  have  felled  a  tree  in  the 
forest;  to  do  this,  again,  he  must  have  made  an  axe,  and  so  on.  But 
there  is  still  a  third  way;  instead  of  felling  one  tree  he  fells  a  mmiber 
of  trees,  splits  and  hollows  them,  lays  them  end  for  end,  and  so  con- 
structs a  runnel  or  rhone  which  brings  a  full  head  of  water  to  his 
cottage.  Here,  obviously,  between  expenditure  of  the  labor  and  the 
obtaining  of  the  water  we  have  a  very  roundabout  way,  but  then,  the 
result  is  ever  so  much  greater.  Our  peasant  needs  no  longer  take 
his  weary  way  from  house  to  well  with  the  heavy  pail  on  his  shoulder, 
and  yet  he  has  a  constant  and  full  supply  of  the  freshest  water  at  his 
very  door. 

Another  example.  I  require  stone  for  building  a  house.  There  is 
a  rich  vein  of  excellent  sandstone  in  a  neighboring  hill.  How  is  it  to 
be  got  out  ?  First,  I  may  work  the  loose  stones  back  and  forward  with 
my  bare  fingers,  and  break  off  what  can  be  broken  off.  This  is  the 
most  direct,  but  also  the  least  productive  way.  Second,  I  may  take 
a  piece  of  iron,  make  a  hammer  and  chisel  out  of  it,  and  use  them  on 
the  hard  stone — a  roundabout  way,  which,  of  course,  leads  to  a  very 
much  better  result  than  the  former.  Third  method — having  a  hammer 
and  chisel  I  use  them  to  drill  a  hole  in  the  rock;  next  I  turn  my 

'  From  Eugen  von  Bohm-Bawerk,  Positive  Theory  of  Capital,  translated  by 
W.  Smart,  pp.  18-19.    Macmillan  &  Co.,  1891. 

IS7 


158  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

attention  to  procuring  charcoal,  sulphur,  and  nitre,  and  mixing  them 
in  a  powder,  then  I  pour  the  powder  into  the  hole,  and  the  explosion 
that  follows  splits  the  stone  into  convenient  pieces — still  more  of  a 
roundabout  way,  but  one,  which,  as  experience  shows,  is  as  much 
superior  to  the  second  way  in  result  as  the  second  was  to  the  first. 

Yet  another  example.  I  am  short-sighted,  and  wish  to  have  a 
pair  of  spectacles.  For  this  I  require  ground  and  polished  glasses,  and 
a  steel  framework.  But  all  that  nature  offers  toward  that  end  is 
silicious  earth  and  iron  ore.  How  am  I  to  transform  these  into  spec- 
tacles ?  Work  as  I  may,  it  is  as  impossible  for  me  to  make  spectacles 
directly  out  of  silicious  earth  as  it  would  be  to  make  the  steel  frames 
out  of  the  iron  ore.  Here  there  is  no  immediate  or  direct  method  of 
production.  There  is  nothing  for  it  but  to  take  the  roundabout 
way,  and,  indeed,  a  very  roundabout  way.  I  must  take  the  silicious 
earth  and  fuel,  and  build  furnaces  for  smelting  the  glass  from  the 
silicious  earth;  the  glass  thus  obtained  has  to  be  carefully  purified, 
worked,  and  cooled  by  a  series  of  processes;  finally,  the  glass  thus 
prepared — again  by  means  of  ingenious  instruments  carefully  con- 
structed beforehand — is  ground  and  polished  into  the  lens  fit  for  short- 
sighted eyes.  Similarly,  I  must  smelt  the  ore  in  the  blast  furnace, 
change  the  raw  iron  into  steel,  and  make  the  frame  therefrom— 
processes  which  cannot  be  carried  through  without  a  long  series  of 
tools  and  buildings  that,  on  their  part  again,  require  great  amounts 
of  previous  labor.  Thus,  by  an  exceedingly  roundabout  way  the 
end  is  attained. 

The  lesson  to  be  drawn  from  all  these  examples  alike  is  obvious. 
It  is — that  a  greater  result  is  obtained  by  producing  goods  in  round- 
about ways  than  by  producing  them  directly.  Where  a  good  can  be 
produced  in  either  way,  we  have  the  fact  that,  by  the  indirect  way,  a 
greater  product  can  be  got  with  equal  labor  or  the  same  product 
with  less  labor.  But,  beyond  this,  the  superiority  of  the  indirect 
way  manifests  itself  in  being  the  only  way  in  which  certain  goods  can 
be  obtained;  if  I  might  say  so,  it  is  so  much  the  better  that  it  is  often 
the  only  way! 

42.    MACHINERY  USED  IN  THE  MAKING  OF  PINS' 

Pins. — In  the  manufacture  of  pins,  unit  486,  as  in  most  of  the 
units  of  this  industry,  the  first  operation  wa'.^  that  of  straightening  the 

'  Froir  the  Thirteenth  Annual  Report  of  the  Commissioner  of  Labor  (1898),  I, 
3.^8-39. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS  159 

wire.  This  was  done  by  means  of  a  wire-straightening  machine  under 
both  methods,  but  the  time  under  the  modern  method  was  only  6 
minutes,  while  4  hours,  or  forty  times  as  long,  were  required  under 
the  primitive  method.  Under  the  machine  method,  in  the  second 
operation,  the  wire  was  cut  and  the  pins  headed  and  pointed  by  pin 
machines,  12  of  which  were  tended  by  i  person.  The  total  time 
charged  to  this  operation  was  26 . 4  minutes.  Under  the  hand  method 
the  pin  was  made  in  two  parts,  the  head  being  made  in  the  form  of  a 
coil  and  closed  over  the  end  of  the  shaft.  It  required  seven  operations 
to  make  the  pin  under  this  method,  and  the  aggregate  time  required 
was  129  hours,  or  two  himdred  and  ninety-three  times  as  long  as  was 
required  under  the  machine  method  to  accomplish  the  same  result. 
Whitening  the  pins  was  accomplished  by  means  of  a  whitening  tank 
operated  by  hand  under  both  methods.  Under  the  modern  method 
this  operation  required  i .  8  minutes  as  against  30  minutes  required 
under  the  primitive  method.  The  operation  of  drying  and  cleaning  the 
pins  was  performed  under  the  machine  method  by  the  use  of  a  fanning 
mill  in  3  minutes,  while  under  the  hand  method,  by  means  of  a  drying 
pan,  I  hour  was  required.  The  pins  were  polished  in  a  tumbling  barrel 
under  both  methods,  requiring  i .  2  minutes  under  the  modern  and  30 
minutes,  or  twenty-five  times  as  long,  under  the  primitive  method. 
Pin-sticking  machines  were  used  under  the  modern  method  for  stick- 
ing the  pins  into  paper,  the  work  being  done  in  30  minutes.  Under 
the  hand  method  this  was  accomplished  in  two  operations,  crimping 
the  paper,  which  required  15  minutes,  and  sticking  in  the  pins,  which 
required  2  hours.  Folding  the  papers,  packing  and  labeling,  and 
overseeing  each  required  less  time  under  the  machine  than  under 
the  hand  method.  Under  the  hand  method  the  time  charged  to 
furnishing  the  power  was  i  hour,  while  under  the  machine  method 
the  motive  power  was  water,  and  there  was  no  time  charged  to 
furnishing  it;  but  6  minutes  were  charged  to  keeping  the  machinery 
in  order. 

The  total  time  required  for  the  production  of  12  packages  of  i 
pound  each  of  pins  under  the  machine  method  was  i  hour  and  33 . 9 
minutes  as  against  140  hours  and  55  minutes  required  under  the  hand 
method — a  ratio  of  about  90  to  i  in  favor  of  the  modern  method. 
The  handmade  pins  were  made  in  England  by  the  labor  of  12  persons 
and  finished  in  the  United  States  by  5  persons,  wliile  16  persons  worked 
on  the  machine  product.  The  machine-made  pin  is  a  much  more 
desirable  article  than  the  handmade. 


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CAPITAL  GOODS  AS  ECONOMIC  FACTORS  i6l 

44.    MACHINERY  vs.  HAND  LABOR  IN  THE  RAISING  OF 

SMALL  GRAINS' 

Small  grains. — Units  3,  barley;  13,  oats;  17,  rice;  18,  rye,  and 
26  and  27,  wheat  may  be  grouped  under  this  head  and  be  considered 
together  as  to  a  number  of  operations.  In  seeding,  a  sack  was  the 
tool  or  implement  used  in  all  these  units  under  the  earlier  methods, 
the  seed  being  sown  broadcast  and  covered  by  the  use  of  a  brush, 
drag,  or  harrow.  The  time  for  sowing  the  seed  was  quite  uniform, 
being,  under  the  primitive  method,  i  hour  and  25  minutes  in  units 
3,  13,  and  27;  I  hour  and  22.5  minutes  in  unit  17;  i  hour  and  15 
minutes  in  unit  26,  and  i  hour  in  unit  18.  Under  the  modern  method 
a  broadcast  seeder  was  used  in  units  13  and  26,  the  sowing  being  done 
in  20  minutes  and  15  minutes,  respectively,  or  in  about  one-fourth 
and  one-fifth  of  the  time  required  by  hand,  as  just  shown.  The  sub- 
sequent harrowing  to  cover  the  seed  occupied  50  minutes  and  12 
minutes,  respectively,  in  these  units  as  against  2  hours  and  50  minutes 
and  2  hours  and  30  minutes  under  the  earlier  method.  In  unit  17 
the  seed  was  sown  and  covered  at  one  operation  in  55  minutes  as 
against  a  total  of  3  hours  and  12.5  minutes  required  for  the  work 
done  in  two  operations  under  the  more  primitive  method.  The  same 
conditions  were  found  in  unit  18  as  in  unit  17,  the  time  being  i  hour 
under  the  modern  and  2  hours  and  40  minutes  under  the  primitive 
method.  The  greatest  advance  in  these  units  is  to  be  seen  in  those 
numbered  3  and  27,  where,  under  the  machine  method,  a  combined 
gang  plow,  seeder,  and  harrow  broke  the  groimd,  sowed  and  covered 
the  seed,  and  pulverized  the  topsoil  at  one  operation.  This  was 
accomplished  in  unit  3  in  10.9  minutes,  the  power  being  a  traction 
engine  requiring  the  attention  of  two  men,  making  the  aggregate 
time  21.8  minutes.  In  unit  27  the  same  work  was  done  in  15  minutes, 
the  aggregate  time  for  the  engineer  and  fireman  necessary  to  run  the 
machine  being  30  minutes.  Strictly  speaking,  the  time  of  the  water- 
hauler  should  be  added,  as  he  was  necessary  for  the  operation  of  the 
machines  used.  Adding  this  time  and  comparing  it  with  the  total 
time  required  for  the  operations  done  separately  by  the  primitive 
method,  the  time  was  32.7  minutes  under  the  modern  as  against  10 
hours  and  55  minutes  under  the  primitive  method  in  unit  3,  and  45 
minutes  as  against  10  hours  and  55  minutes  in  unit  27,  a  reduction 
to  about  one-twentieth  and  one-fifteenth  the  time  required  under  the 

'  From  the  Thirteenth  Annual  Report  of  the  Commissioner  of  Labor  (1898), 
I,  84-87. 


l62  MATERIALS  FOR  ELEMENT.\RY  ECONOMICS 

hand  method  in  the  respective  units.  This  great  saving  is  accounted 
for  by  the  fact  that  the  implement  used  under  the  modern  method 
was  a  6-gang  plow,  each  gang  having  4  plows,  each  plow  cutting  10 
inches — total  240  inches — with  a  seeder  and  harrow  attached  to  each 
gang,  and  all  operated  by  a  traction  engine.  This  would  seem  to 
mark  the  limit  of  progress  in  this  direction,  and  such  machinery  is 
obviously  of  profitable  use  only  in  a  level  country  where  farming  is 
conducted  on  a  large  scale. 

The  operation  of  harvesting  was  uniformly  accomplished  by  the 
use  of  a  sickle  under  the  earlier  method,  the  cutting  and  binding  being 
done  by  hand.  Comparisons  cannot  be  made  in  all  of  the  units,  as 
the  operations  vary  so  much  under  the  modern  method.  Three  units 
show  the  use  of  self-binders  and  three  the  use  of  the  combined  reapers 
and  thrashers  which  do  away  with  the  operations  of  binding  and 
shocking  the  grain.  In  unit  13  the  use  of  the  self-binder  reduced  the 
time  for  cutting,  binding,  and  shocking  under  the  modern  method  to 
2  hours  as  against  16  hours  and  40  minutes  under  the  primitive,  these 
operations  under  the  primitive  method  requiring  more  than  eight 
times  as  long  as  under  the  modern.  In  unit  17  the  saving  was  still 
greater,  the  cutting  and  binding  being  done  in  55  minutes  under  the 
modern  as  against  ^^  hours,  or  thirty-six  times  as  long,  under  the 
primitive  method  by  the  use  of  sickles,  no  shocking  being  reported. 
The  grain  was  shocked  in  unit  18,  but  the  operation  is  kept  separate, 
so  that  a  comparison  can  be  made  as  to  the  different  operations.  The 
cutting  and  binding  required  i  hour  with  the  self-binder,  and  11  hours 
and  33.8  minutes  with  sickles,  while  the  shocking  required  2  hours 
under  each  method.  The  more  complex  machines,  reported  in  units 
3,  26,  and  27,  were  propelled  by  steam  in  units  3  and  27,  and  by  26 
horses  in  unit  26.  Here  the  grain  was  reaped,  thrashed,  and  sacked 
in  one  continuous  operation.  In  unit  3  the  operations  necessary  to 
do  this  work  under  the  earlier  method  required  48  hours  and  40 
minutes,  while  under  the  later  method  the  time  required  by  the 
machine  was  7.5  minutes,  7  men  being  employed,  making  the  total 
time  52.5  minutes;  including  the  time  of  the  two  water-haulers,  for 
the  same.reasons  as  noted  in  discussing  the  combined  plow  and  seeder, 
the  total  time  under  the  machine  method  was  i  hour  and  7 . 5  minutes, 
or  about  one-forty-third  the  time  required  when  sickles  and  flails 
were  used.  In  unit  27  the  totals  are  49  hours  and  20  minutes  under 
the  earlier  method  and  i  hour  and  21  minutes  under  the  later.  The 
totals  in  unit  26  show  the  best  proportionate  results  from  the  use  of 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS  163 

the  combined  reaper  and  thrasher,  being  46  hours  and  40  minutes 
under  the  earlier  and  i  hour  under  the  later  method.  The  time  for 
binding  and  shocking  grain  and  stacking  straw  is  included  in  the  time 
for  the  hand  methods  given  above  (units  3,  26,  and  27),  which  opera- 
tions were  not  necessary  under  the  machine  method. 

Thrashing  is  reported  as  a  separate  operation  in  units  13,  17,  and 
18.  In  units  13  and  18  the  work  was  done  under  the  earlier  method 
entirely  by  hand,  the  flail,  pitchfork,  shovel,  and  winnowing  sheet 
being  the  tools  used,  while  in  unit  17a  horse-power  thrasher  was  used 
in  1870.  This  thrasher  took  13  hours  and  17.5  minutes  to  do  the 
work  done  by  the  steam  thrasher  in  2  hours  and  37.5  minutes.  In 
unit  13,  under  the  hand  method,  the  thrashing  required  41  hours  and 
5  minutes  as  against  i  hour  and  16.8  minutes,  the  time  required  by 
the  use  of  the  modern  thrasher  (including  the  time  charged  to  hauling 
water) — a  ratio  of  more  than  32  to  i  in  favor  of  the  machine.  In 
unit  18,  the  time  required  under  the  earlier  and  later  methods,  respec- 
tively, was  26  hours  and  45 .  i  minutes  and  7  hours.  This  dispro- 
portionately long  time  required  (7  hours)  is  explained  in  part  by  the 
fact  that  the  length  of  the  rye  straw  made  the  work  much  slower  than 
with  other  grains,  and  in  part  by  the  fact  that  the  rye  being  thrashed 
from  the  barn  mow,  more  men  were  necessary  than  if  it  had  been 
thrashed  from  wagons.  The  actual  running  time  of  the  thrasher  in 
this  case  was  30  minutes. 

This  group  presents  a  comparison  of  extremes,  the  appliances 
being  entirely  changed  throughout  in  some  of  the  units,  showing  a 
more  complete  supplanting  of  hand  by  machine  labor  than  can  be 
found,  perhaps,  in  any  other  line  of  agriculture.  These  changes  have 
taken  place  in  the  past  65  years,  as  indicated  by  the  dates  given  in 
these  units,  though  in  fact  most  of  them  have  occurred  in  a  much 
shorter  period.  In  units  3  and  27  the  number  of  operations  is  prac- 
tically reduced  to  two,  and  it  is  in  these  units  that  the  greatest  aggre- 
gate saving  was  effected,  the  total  time  in  unit  3  being  63  hours  and 
35  minutes  under  the  earlier  and  2  hours  and  42.8  minutes  under  the 
later  method — a  ratio  of  more  than  23  to  i  in  favor  of  the  modern 
method;  while  in  unit  27  the  respective  totals  are  64  hours  and  15 
minutes  and  2  hours  and  58.2  minutes — a  ratio  of  nearly  22  to  i. 
These  results  are  the  best  shown  in  this  industry. 


l64  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

45.    MACraNE  METHODS  IN  AGRICULTURE' 

The  Thirteenth  Annual  Report  of  the  Department  of  Labor  gives 
the  results  of  an  extended  investigation  concerning  production  by 
hand  and  by  machine  methods,  and  affords  the  means  for  a  rehable 
estimate  of  the  influence  of  machine  power.  That  portion  devoted 
to  agricultural  operations  shows  in  detail,  for  example,  how  many 
persons  were  ordinarily  required  for  the  production,  by  hand  or  by 
machine  methods,  of  a  given  quantity  of  barley;  what  separate  opera- 
tions were  necessary  in  that  production,  as  plowing,  sowing,  harrow- 
ing, etc.;  what  time  was  required  for  each  operation,  what  tools  or 
machines,  if  any,  or  other  helps  were  used,  and  the  money  cost  of 
each  operation. 

From  the  summary  given  on  pp.  24-25  of  that  report  it  appears 
that  the  man-labor  power  requisite  for  the  production  of  thirty 
bushels  of  barley  by  the  methods  commonly  in  use  in  the  season  of 
1829-30,  amounted  to  63  hours  and  35  minutes.  The  man-labor 
power  required  for  accomplishing  the  same  result,  by  the  methods 
commonly  in  use  in  the  season  of  1895-96,  is  shown  to  have  been  only 
2  hours  and  42.8  minutes.  From  such  data,  the  barley  crop  of  1896 
being  known,  we  may  readily  determine  not  only  what  amount  of 
man-labor  was  requisite  for  the  production  of  that  crop  by  the  means 
commonly  in  use  at  that  time,  but  also  how  much  barley  that  same 
labor-power  could  have  produced  by  the  means  commonly  in  use  in 
the  season  of  1829-30.  The  difference  between  the  quantity  actually 
produced  in  the  season  of  1895-96,  and  the  quantity  which  the  labor- 
power  required  for  the  work  of  that  season  could  have  produced  by 
the  earlier  hand  methods,  will  represent  the  greater  product  due  to 
the  use  of  machinery.  The  crediting  of  the  whole  of  this  difference 
to  the  use  of  machinery  is,  doubtless,  crediting  it  with  too  much. 
Credit  is  due,  also,  to  better  methods  of  cultivation,  to  pulverization 
of  soils,  to  the  use  of  fertilizers,  to  irrigation,  rotation  of  crops,  better 
seed,  etc.  These  are  not  machine  forces,  although  they  are  largely 
dependent  upon  the  use  of  machinery  as  the  use  of  machinery  is,  in 
some  degree,  dependent  upon  them.  But  to  attempt  the  separation 
of  these  credits  would  be  much  like  attempting  to  determine  which 
blade  of  a  pair  of  shears  does  the  cutting.  Moreover,  these  various 
other  forces  play,  comparatively,  a  very  incidental  and  subsidiary 

'  Adapted  from  H.  W.  Quaintance,  The  Influence  of  Farm  Machinery  on  Pro- 
duction and  Labor,  in  Publications  of  the  American  Economic  Association,  Third 
Series,  Vol.  V  (1904),  No.  4,  pp.  19-27. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS 


i6S 


part.  I  believe  that  the  following  pages  will  justify  this  opinion  and 
venture,  therefore,  to  disregard  whatever  inaccuracy  there  may  be 
involved  in  the  statement  and  to  say  that  the  entire  increased  product 
is  due  to  the  use  of  machinery.' 

It  will  be  sufficient,  for  purposes  of  illustration,  to  consider  only 
a  few  of  the  principal  crops  in  the  production  of  which  machinery  has 
become  a  recognized  factor.  The  crops  selected  for  this  purpose, 
together  with  the  time  of  man-labor  requisite  for  producing  stated 
quantities  of  each  crop  by  hand  and  by  machine  methods,  as  reported 
by  the  Department  of  Labor,  are  shown  in  the  following  table: 


Unit 
No.» 


3-  • 
9-  • 

lO.  . 


12 

13 

i6 

17 
i8 
26 


Name  and  Quantity  of  Crop 

Produced  and  Description 

OF  Work  Dons 


Barley:  30  bushels  (i  acre) 

barley 

Com:   40  bushels  (1  acre) 

yellow     com,     husked; 

stalks  left  in  field 

Cotton:     By    hand,    750 

pounds;      by     machine 

1000    pounds   (i   acre) 

seed  cotton 

Hay:    Harvesting    i    ton 

(i  acre)  timothy  hay.  . 
Oats:  40  bushels  (i  acre) 

oats 

Potatoes:    220  bushels  (i 

acre)  potatoes 

Rice:  2640  pounds  (i  acre) 

rough  rice 

Rye:    25  bushels  (i  acre) 

rye 

Wheat:  20  bushels  (i  acre) 

wheat 


Year  of 
Production 


Hand      Machine 


1829-30 
1855 

1841 
1850 
1830 
1866 
1870 
1847-48 
1829-30 


1895-96 
1894 

1895 
1895 
1893 
189s 
189s 
1894-95 
1895-96 


Time  Worked 


Hand 


Hrs.        Min. 


63 
38 

167 
21 

66 
108 
62 
62 
61 


350 

45° 

48.0 

50 
150 

S5-0 
S-o 

58.9 
S-o 


Machine 


Hrs.        Min. 


15 

78 

3 

7 

38 

17 

25 

3 


42.8 
7.8 

42.0 

56.5 
S-8 

2-5 

10. o 

19.  2 


♦The  "unit  numbers"  here  given  are  the  unit  numbers  made  use  of  in  the  Thirteenth  Annual 
Report  of  the  Department  of  Labor,  from  which  the  data  in  the  table  are  taken.  The  numbers  are 
repeated  here  only  for  purposes  of  reference. 

These  several  crops  for  the  years  covered  by  the  data  concerning 
production  by  the  aid  of  machine  power,  were  as  follows: 

'  For  the  purpose  of  this  discussion  I  shall  use  the  term  machinery,  generally, 
to  signify  not  only  machines,  but  also  tools  or  implements,  and  other  man-labor- 
saving  forces  when  used  as  essential  adjuncts  or  parts  of  machines.  For  example, 
horses,  when  used  to  draw  a  reaping  machine,  will  be  considered  as  much  a  part 
of  the  machine  as  an  engine  and  boiler  would  be,  if  used  for  the  same  purpose. 


i66 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Name 

^ 

Barley 

Com 

Cotton 

Hay 

Oats 

Potatoes 

Rice 

Rye 

Wheat 


Crop  of 


Quantity  Produced 


1896 

(bushels) 

1894 

(bushels) 

189s 

(soo-pound  bales) 

189s 

(tons) 

1893 

(bushels) 

189s 

(bushels) 

1896 

(pounds) 

189s 

(bushels) 

1896 

(bushels) 

69,695,223 

1,212,770,052 

7,161,094 

47,078,541 
638,854,850 

297,237,370 
168,685,440 

27,210,070 

427,684,346 


The  number  of  days'  work  of  man-labor  requisite  for  producing  the 
foregoing  specified  crops  by  the  aid  of  machine  power,  together  with 
the  quantity  of  those  several  crops  which  the  same  labor-power  could 
have  produced  by  the  earlier  hand  method,  are  shown  in  the  following : 


Nahb 


Crop  ot 


Days'  Work  op 

Man-Labor 

Required 


The  Same  Labor-Power 


By  Methods 
of 


Could  Have  Produced 


Barley.  . 
Com .  .  . 
Cotton .  , 
Hay.... 

Oats 

Potatoes 

Rice 

Rye 

Wheat . . 


1896 
1894 
1895 
1895 
1893 
189s 
189s 
1895 
1896 


630,354 
45,873,027 
28,178,904 
18,556,791 
11,334,266 
5,134,100 

108,889 

2,739,147 
7,099,560 


1829-30 

1855 
1841 
1850 
1830 
1866 
1870 
1847-48 
1829-30 


(bushels) 

(bushels) 

(bales) 

(tons) 

(bushels) 

(bushels) 

(pounds) 

(bushels) 

(bushels) 


2,972,839 

473,528,022 

2,518,972 

8,801,640 

68,433,307 
103,703,321 

46,303,587 
10,872,795 

23,245,490 


Finding  next  the  difference  between  the  quantities  of  the  several 
crops  actually  produced  under  machine  methods,  in  the  years  indi- 
cated, and  the  quantities  which  the  labor-power  requisite  for  their 
production  with  the  aid  of  machines  could  have  produced  had  it  been 
devoted  to  the  production  of  those  same  crops  by  hand  methods,  we 
have  the  following: 


Name 


Crop  of 


Due  to  Use  of  Machinery 


Percentage  of 
Actual  Product 


Barley . . 
Com . . . 
Cotton . , 

Hay 

Oats .  .  . 
Potatoes 

Rice 

Rye 

Wheat.  . 


1896 
1894 
189s 
1895 
1893 
1895 
1895 
1895 
1896 


(bushels) 

(bushels) 

(bales) 

(tons) 

(bushels) 

(bushels) 

(pounds) 

(bushels) 

(bushels) 


66,722,384 

739,242,030 

4,642,122 

38,276,901 
570,421,543 

193,534,049 

122,381,853 

16,337,275 

404,438,856 


95-7 
60.9 
64.8 

81.3 
89.2 

65.1 

72. 5 
60.0 

94  5 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS  167 

The  increased  effectiveness  of  man-labor  power  when  aided  by 
the  use  of  machinery,  as  indicated  by  these  figures,  varies  from  150 
per  cent  in  the  case  of  rye  to  2244  per  cent  in  the  case  of  barley. 
From  this  point  of  view  a  machine  is  not  a  labor-saving  but  rather 
a  product-making  device.  Taking  the  per  cent  of  labor  saved,  as 
indicating  the  average  proportion  of  these  crops  due  to  the  use  of 
machinery,  it  appears  that  the  quantity  of  product  is  almost  five 
times  as  great,  per  unit  of  labor,  as  it  formerly  was. 

Touching  the  difference  in  the  cost  of  production  per  unit  of 
product  the  Thirteenth  Annual  Report  of  the  Department  of  Labor 
furnishes  some  data  that  will  well  repay  a  somewhat  extended  con- 
sideration. It  should  be  observed,  however,  that  these  data  with 
reference  to  the  cost  of  production,  although  collected  at  the  same 
time  and,  doubtless,  with  the  same  care,  as  the  data  already  taken 
from  that  report,  are,  nevertheless,  for  the  purposes  of  generalization, 
far  less  reliable.  The  average  workman  will  perform  the  same  quan- 
tity of  work  in  a  day,  whether  he  works  in  one  locality  or  in  anothei ; 
but  rates  of  wages  vary  with  localities  and  may  vary  both  absolutely 
and  relatively  with  differences  in  time.  With  this  qualification  in 
mind,  it  will  be  safe  to  take  up  the  consideration  of  the  data. 

Including  the  crops  above  considered,  the  report  of  the  Depart- 
ment of  Labor  gives  detailed  information  concerning  the  cost  of 
production,  by  hand  and  by  machine  methods,  of  twenty-one  differ- 
ent crops.  The  table  "Cost  of  Producing  by  Hand  and  by  Machine 
Methods"  gives  the  results  of  the  several  investigations  in  this 
particular,  arranged  in  the  order  of  the  greatest  saving  in  cost  of 
production  by  machine  as  compared  with  hand  methods.' 

•  In  the  production  of  peas  and  in  both  tobacco  crops  there  has  been  an 
increase  in  the  cost.  This  increase  is  not,  however,  from  the  use  of  machinery  in 
the  production  of  these  crops,  but  rather  from  the  lack  of  it.  In  the  case  of  tobacco 
(unit  22),  for  example,  in  which  there  has  been  the  greatest  increase  in  cost,  the 
hand  method  production  was  with  the  aid  of  the  following:  wagon,  spades,  hoes, 
rakes,  wooden  moldboard  plows,  harrow,  turn  plow,  wooden  pegs  for  setting  plants, 
plow  for  cultivating,  and  tobacco  knives.  The  total  extent  of  the  machinery  used 
in  the  production  of  this  crop  by  machine  methods  was  as  follows:  plow,  harrow 
rakes,  hoes,  disk  harrow,  drag,  wagon  and  barrels,  transplanter,  double-shovel 
plow,  tobacco  knives,  wagon  and  racks,  and  screw  racket  prize.  {Thirteenth 
Annual  Report,  Deparlment  of  Labor,  page  464.) — It  must  be  evident  at  once 
from  a  comparison  of  these  items  that  the  difference  in  machinery  cannot  account 
for  the  difference  in  cost  of  production.  The  cause  of  the  increased  cost  in  the 
production  of  tobacco  and  peas  (units  15,  22,  and  23)  was  a  higher  rate  of  wages. 
In  the  case  of  peas,  wages  rose  from  625  cents  to  $x  .00  per  day.     In  the  case  of 


x68 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


The  per  cent  column  of  the  table  on  p.  169  shows  that,  for  the 
most  part,  there  has  been  a  very  great  decrease  in  the  cost  of  pro- 
ducing these  various  crops.  The  median  is  39.92  per  cent,  but  this 
nimiber  is  clearly  too  low,  for  the  crops  in  which  machinery  is  most 
used  are  principally  in  the  upper  part  of  the  table. 

The  data  requisite  for  a  similar  showing  with  respect  to  all  farm 
crops  and  for  any  certain  period  are,  I  think,  not  to  be  had;  but  we 
can  apply  the  data  presented  in  the  table  on  p.  169  to  the  principal 
crops  of  the  year  1899,  as  reported  by  the  Twelfth  Census.  The 
results  are  as  follows: 

Cost  of  Producing  Certain  Crops  of  the  Year  1899,  by  Hand  and  by 

Machine  Methods 


Naue 

Quantity  Produced 

Cost  op  Production 

Hand  Method 

Machine  Method 

Barley 

(bushels)       119,634,877 
(pounds)         90,947,370 
(bushels)    2,666,440,279 
(bales)              9,534,707 
(tons)              84,011,299 
(bushels)       943,389,375 
(bushels)         11,791,121 
(bushels)           9,440,269 
(bushels)       273,328,207 
(pounds)       283,722,627 
(bushels)         25,568,625 
(tons)                6,441,578 
(bushels)         42,526,696 
(pounds)       868,163,275 
(bushels)       658,534,252 

$   15,472,777 

4,107,576 

335,304,865 

58,638,448 

161,301,694 

90,801,227 

1,535,675 
3,143,609 

16,373,935 
773,788 

5,369,411 
12,986,221 
41,676,162 

6,424,408 
126,109,309 

$     4,227,098 

1,153,650 

220,647,933 

44,898,469 
52,927,118 

37,735,575 
1,126,759 
3,190,810 
7,417,133 
223,539 
4,397,803 

5,272,431 

4,167,616 

18,491,859 

66,841,226 

Broom-corn 

Corn 

Cotton 

Hay 

Oats 

Onions 

Peas 

Potatoes 

Rice 

Rye 

Sugar  cane 

Sweet  potatoes.  .  . 
Tobacco 

Wheat 

Total 

$880,019,105 

$472,719,019 

tobacco  (unit  22),  wages  rose  from  30  cents  per  day  to  $20  and  $23  per  month; 
in  unit  23,  the  rise  of  wages  was  from  75  cents  to  $1 .00  per  day.  It  will  be  readily 
understood  that  when  there  is  little  or  no  change  in  the  methods  of  production  a 
rise  in  the  rate  of  wages  must  cause  a  rise  in  the  total  cost  of  production. 

The  "hand  method"  of  production,  as  explained  in  the  report  of  the  depart- 
ment, "should  not  be  construed  to  mean  a  method  whereby  a  product  is  made 
entirely  by  the  unaided  hand  and  absolutely  without  the  use  of  machines,  but 
rather  as  the  primitive  method  of  production  which  was  in  vogue  before  the  general 
use  of  automatic  or  power  machines." — {Thirteenth  Annual  Report,  Department 
of  Labor,  page  11.) — Similarly,  it  should  be  observed,  in  this  connection,  that 
"machine  method"  does  not  necessarily  imply  that  machines  are  used,  but  only 
that  the  work  was  done  by  the  most  approved  methods  practiced  in  more  recent 
years. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS 
Cost  of  Producing  by  Hand  and  by  Machine  Methods 


169 


Unit 
No* 


3- 
27. 

5- 
17- 
21 . 

12. 


20. 

13- 
19. 

24- 
16. 

26. 
II. 


4- 
9- 


7- 

14- 

I. 

10. 

18 
25 

6 
IS 
23 

32 


Name  and  Quantity  of  Crop 
Produced 


Barley:  30  bushels  (i  acre) 
Wheat:  20  bushels  (i  acre) 
Broom-corn:  i  ton  (3  acres) 
Rice:  2,640 pounds  (i  acre) 
Sweet  potatoes:  105  bushels 

(i  acre) 

Hay:   Harvesting  i  ton  (i 

acre)  timothy  hay 

Com:    40  bushels  (i  acre) 

yellow    corn,    shelled; 

stalks,  husks,  and  blades 

cut  into  fodder 

Sugar  com:  20  tons  (i  acre) 
Oats:  40  bushels  (i  acre) . . 
Strawberries:   4,000  quarts 

"•(i  acre) 

Tomatoes:    150  bushels  (i 

acre) 

Potatoes:    220  bushels   (i 

acre) 

Wheat:  20  bushels  (i  acre) 
Hay:   Harvesting  and  bal- 
ing I  ton  (i  acre)  timothy 

hay 

Apple  trees:  10,000  (i  acre) 

32  months,  from  grafts. . 
Beets:  300  bushels  (i  acre) 
Com:   40  bushels  (i  acre) 

yellow   corn,    husked; 

stalks  left  in  field 

Carrots:  30  tons  (i  acre) . . 
Onions:  250 bushels  (i  acre) 
Apple  trees:  10,000  (i  acre) 

3  2  months,  from  grafts . . 
Cottonf:     By    hand,    750 

pounds;      by     machine, 

1 ,000  pounds  (i  acre) . . . 
Rye:  25  bushels  (i  acre). . 
Tumips:     350   bushels    (i 

acre) 

Carrots:  30  tons  (i  acre) . . 

Peas:  20  bushels  (i  acre) 
field  peas 

Tobacco:  1,500  pounds  (i 
acre)  Spanish  seed  leaf .  . 

Tobacco  J:  By  hand,  1,200 
pounds;  by  machine, 
1,250  poimds  (i  acre) . . . 


Year  of  Production 


Hand 
Method 


1829-30 

1829-30 

i860 

1870 

1868 

1850 


1855 
1855 
1830 

1871-72 

1870 

1866 
1829-30 

i860 

1870-72 
1850 


1855 
1850 
1850 

1869-71 


1841 
1847-48 

1855 
1855 

1856 
1853 

1844 


Machine 
Method 


1895-96 
1895-96 

1895 
.  1895 

1895 
189s 


1894 
1895 
1893 

1894-95 
1895 

1895 
1895-96 

1894 

1893-95 
1895 


1894 
189s 
189s 

1893-95 


1895 
1894-95 

1895 
189s 

1895 
189s 

1895 


Cost 


Hand 
Method 


$     3-88 
4.00 

90-33 
7.20 

34-3° 
1.92 


16.34 

40.32 

3-85 

231.28 
36.62 
13  18 

3  19 

200.00 
32.30 


503 
38.71 
32.56 

202.00 


6.15 
5.25 

25  63 
30.61 

6.66 
25  85 

•74 


Machine 
Method 


1.06 
1. 12 

25.37 
2.08 

10.29 
•63 


6.62 

16.37 

1.60 

97.92 

15.88 

5.97 
2.03 

1. 91 

I  2 1 . 00 
20.01 


3-31 
37.21 
23.89 

150.69 


4-71 
4.30 

23.36 
29.96 

6.76 
27.99 


Percent- 
age OF 
Decrease 


2.67 


72.62 
71.98 
71.92 
71.09 

70.00 
66.95 


59.49 
59.40 
58.47 

57-66 
56.64 

54.68 
47.11 

39-92 

39  50 
38-05 


34.20 
29.72 
26.64 

25-41 


23.42 
18.10 

8.88 

2.13 

Percentage 
of  Increase 

1.56 
8.28 


261.42 


*  See  note  to  table  on  page  165. 

t  The  data  have  been  modified  to  show  a  comparison  on  the  basis  of  equal  quantities  pro- 
duced. If  the  equal  areas  be  taken  instead,  the  line  should  read:  Cotton:  By  hand,  etc.,  $9.23; 
I9.42;  2.09. 

X  The  data  have  been  modified  to  show  a  comparison  on  the  basis  of  equal  quantities  pro- 
duced. If  the  equal  areas  be  taken  instead,  the  line  should  read:  Tobacco:  By  hand,  etc, $8.88; 
$33-39;  *76.33 


170 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


The  estimated  cost  of  producing  these  crops  by  machine  method 
is  only  53 . 7  per  cent  of  the  estimated  cost  of  producing  the  same  crops 
by  hand  method.  In  other  words,  the  saving  in  cost  of  production 
amounts  to  46.3  per  cent.  The  average  date  of  the  hand  method 
investigations  made  use  of  in  this  presentation  is  1S50;  the  average 
date  for  the  machine  method  investigations  is  1895 — a  difference  of 
forty-five  years.  Surely  it  will  not  be  too  much  to  say  that  during 
the  last  half  of  the  nineteenth  century  the  cost  of  production  of  these 
crops  was  reduced  by  one-half.  If  we  take  into  account  the  decreased 
cost  to  the  farmer  of  food  and  lodging  for  his  hired  workmen  and 
the  decreased  cost  of  storage  room  for  grain  in  the  straw,  then  the 
total  saving  must  appear  to  be  even  greater  than  this. 


46.    RELATIVE  INCREASE  OF  CAPITAL  AND  EMPLOYEES 

IN  MANUFACTURING 

All  Manofactures  in  the  United  States 


1850 

i860 

1870 

1880 

1890 

1900 

1910 

Percentage 

Increase 

1910  over 

1850 

Average  per  establisbmeat — 
Product 

$8,280 

$4,330 

7.7 

$13,420 

$7,190 

9-3 

$13,420 

$6,720 

8.1 

$2I,IOO 

$10,960 

10.6 

$i8,070 

$19,020 

13.8 

$25,418 

$19,269 

10.4 

$76,993 

$68,638 

250 

830 

1.485 

22s 

Capital 

Number  of  employees .... 

Iron  and  Steel 


Number  of  establishments 

Average  product 

Average  capital 

Average  number  of  em 
ployees 


1850 

i860 

1870 

i88o 

1890 

1900 

1910 

46S 

$43,600 
$46,700 

53 

542 
$97,000 
$82,000 

6S 

726 
$275,000 
$i6i,ooo 

103 

699 
$419,000 
$295,000 

197 

699 
$683 ,000 
$591,000 

250 

668 
$1,203,500 

$858,000 

333 

6S4 
$2,119,000 
$2,282,000 

426 

Percentage 

Increase 

1910  over 

1850 


40 
4.760 
4.787 

704 


47.    SOME  SOURCES  OF  THE  SUPPLY  OF  CAPITAL' 

The  Census  Bureau  gives  fairly  complete  data  as  to  the  wages 
and  incomes  of  those  engaged  in  manufacturing  and  in  some  other 
industries.  This  enables  us  to  make  a  rough  estimate  of  the  earnings 
or  income  of  the  people  of  the  United  States.  By  leading  industries 
this  estimate  is  as  follows: 


'  From  The  Wall  Street  Journal,  January  13  and  lo,  19 12. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS 


171 


Industry 

Persons  Employed 

Wages  and  Salaries 

Earnings  for  Dis- 
tribution 

Manufacturing 

7,405,313 
1,662,550 

851,438 
2,072,112 

358,808 
12,561,936 
10,558,265 

$4,365,613,000 
1,170,432,400 

574,720,650 
1,191,464,400 

430,569,600 
2,300,993,068 
5,329,848,660 

$2,219,472,000 
744,775,000 
338,626,296 
921,366,392 
215,285,277 
2,412,855,450 
3,627,199,400 

Railroads 

Mining 

Merchandizing 

Banking 

Agriculture 

Other  occuDations 

35,470,422 

$15,363,641,778 

$10,479,519,815 

Wages  and  salaries,  in  the  aggregate,  are  50  per  cent  larger  than 
the  total  net  earnings  available  for  distribution,  notwithstanding 
that  we  have  included  with  the  latter  the  net  earnings  of  farmers 
and  planters,  which,  in  a  majority  of  cases,  might,  with  equal  logic, 
be  classed  with  wages  and  salaries.  Small  farms  are  in  the  majority, 
and  their  owners  as  a  rule  earn  no  more  than  a  high  wage,  or  a  fair 
salary. 

One  of  the  surprising  features  disclosed  by  the  financial  history 
of  191 1  is  the  large  amounts  of  new  capital  raised  by  railroad  and 
industrial  corporations  in  face  of  a  general  decline  in  earnings.  When 
margins  of  profit  are  narrow  and  net  earnings  unusually  small  one 
would  naturally  suppose  that  supplies  of  new  capital  would  be  limited; 
but  it  is  evident  that  the  amount  of  new  financing  actually  done  last 
year  was  greater  than  that  accomplished  during  any  previous  year 
since  1901. 

In  the  following  exhibit  is  displayed  the  contrast  between  new 
capital  raised  on  the  one  hand  and  railroad  and  industrial  earnings 
on  the  other. 


1911. 
1910. 

1909. 
1908. 
1907. 
1906. 
1905. 


New  Financing 
Done 


$1,739,487,720 
1,518,272,579 
1,681,620,680 
1,423,199,371 
1,393,913,300 
1,637,013,350 
1,238,978,000 


Railroad  Net 
(I.  C  C.  Figures) 


$881,219,144 
940,076,364 
828,122,822 
787,882,414 
900,567,262 
848,836,771 
742,993,486 


Earnings  of  30  Industria 
Companies 


$315,000,000* 
365,435,284 
337,413,083 
318,200,752 
384,550,204 
356,302,339 
300,883,399 


•  Partly  estimated. 

In  1908  the  amount  of  new  capital  raised  increased  in  face  of 
declining  earnings;   but  the  divergence  was  in  part  due  to  the  fact 


172  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

that  the  earnings  here  given  are  in  general  for  fiscal  years,  whereas 
the  financing  done  is  for  calendar  years.  Moreover,  the  amount  of 
capital  raised  in  1907  had  declined  as  one  would  naturally  expect. 
In  191 1,  however,  the  earnings  of  both  calendar  and  fiscal  years 
showed  marked  declines,  and  yet  the  amount  of  new  capital  raised 
increased  more  than  $220,000,000,  as  compared  with  a  gain  of  less 
than  $30,000,000  in  1908. 

It  is  particularly  surprising  that  the  supply  of  investment  funds 
should  be  so  large  in  a  year  when  railroad  net  earnings  shrank  6 .  i 
per  cent,  industrial  earnings  about  13.8  per  cent,  and  agricultural 
earnings  more  than  9  per  cent.  Nor  should  it  be  overlooked  that 
our  total  borrowings  of  European  capital  last  year  are  estimated  at 
only  about  $173,200,000,  as  compared  with  $340,500,000  the  previous 
year.  Almost  beyond  a  doubt  the  explanation  lies  in  the  reinvest- 
ment of  an  unusually  large  proportion  of  the  dividends  and  interest 
received  by  stock  and  bondholders,  like  insurance  companies,  and 
in  the  large  accumulation  of  savings  or  "capital"  by  our  great  wage- 
earning  and  salaried  classes.  Wages  and  salaries  greatly  exceed 
dividends  and  interest;  and  a  moderate  increase  in  frugality  on  the 
part  of  these  classes  would  seem  a  sufficient  explanation. 

48.    CAPITAL— DEMAND  AND  SUPPLY' 

London,  May  31. — The  year  1913  promises  to  exceed  all  others  in 
amount  of  new  capital  raised  in  this  country.  Indeed,  the  quantity 
of  new  securities  is  so  vast  that  underwriters  and  others  have  begun  to 
call  a  halt. 

The  amount  of  new  capital  which  this  country  can  provide  for 
new  securities  (apart  from  the  capital  needed  for  buildings  and 
private  enterprises)  at  the  present  time  is,  according  to  the  Statist, 
somewhere  about  £220,000,000  a  year,  and  no  surprise  need  be  felt 
that  underwriters  are  becoming  less  and  less  keen  to  take  new  securi- 
ties, seeing  that  the  amount  placed  in  five  months  has  been  nearly 
£150,000,000.  It  is,  of  course,  possible,  that  a  much  larger  amount 
than  an  additional  £70,000,000  may  be  subscribed  before  the  end  of 
the  year,  but  in  that  case  the  instalments  on  the  new  issues  must  be 
extended  well  into  1914. 

In  recent  years,  continues  the  Statist,  the  amount  of  new  capital 
annually  subscribed  in  this  country  has  somewhat  exceeded  £200,- 
000,000.    The  subscriptions  have  by  no  means  been  regularly  spread 

'  From  The  Journal  of  Commerce  and  Commercial  Bulletin,  1913. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS 


173 


over  the  various  parts  of  each  year.  Sometimes  the  amounts  placed 
in  the  early  part  of  the  year  have  been  large;  at  other  times  they 
have  been  small  during  that  period.  On  some  occasions  the  sub- 
scriptions are  heaviest  in  the  last  quarter.  Last  year  the  total  sub- 
scriptions reached  £211,000,000  for  the  year,  of  which  about  one- 
half  was  raised  in  the  first  five  months.  In  the  period  to  the  end  of 
May  of  this  year  the  subscriptions  have  been  nearly  £150,000,000,  in 

Table  I 

Purposes  for  Which  Capital  Was  Subscribed  in  the  United  Kingdom 
IN  the  First  Five  Months  of  the  Last  Two  Years 


Description  of  Security 


First  Five  Months 


1913 


igia 


Government 

Municipal 

Railways 

Banks 

Breweries 

Commercial,  industrial,  etc 

Electric  light  and  power 

Fin.,  land,  investment  and  trust.  . 

Gas  and  water 

Insurance 

Iron,  coal,  steel,  and  engineering.. 

Mines 

Motors  and  motor  manufacturing . 

Nitrate 

Oil 


£44 
12 

47 
I 


,393,031 
,075,516 
,123,220 
,944,965 


Rubber 

Shipping 

Tea  and  coffee 

Telegraphs  and  telephones. 
Tramways 


19 

2 

5 


,126,323 

103,028 

,614,322 

892,410 

132,430 
,895,964 
,829,550 
488,750 
110,000 
,446,100 
816,094 
,102,993 
109,750 
592,000 
,594,000 


£8,021,332 
9,466,946 

28,621,346 

3,020,000 

75,000 

15,096,625 

4,092,354 

6,481,350 

702,000 

132,500 

4,166,605 

3,087,823 

131,812 

2,087,781 
1,664,040 
8,023,812 
97,100 
2,614,970 
6,629,232 


Total* 


£147,390,450 


£104,217,628 


•(Note. — The  arithmetical  discrepancies  occur  in  the  original  table  (Statist,  May  31,  1913). — 
Editors] 

comparison  with  £104,000,000  last  year  and  £110,000,000  in  1891. 
In  considering  the  amount  of  capital  placed  in  the  five  months  just 
ended  we  must  not  forget  that  the  subscriptions  in  the  last  five  months 
of  1913  were  abnormally  small,  amounting  to  only  £50,000,000,  and 
that  the  instalments  on  loans  placed  last  year  which  had  to  be  paid 
in  the  early  part  of  the  present  year  were  unusually  light.  Still, 
when  all  the  circumstances  are  taken  into  account,  it  is  obvious  that 
the  issues  of  new  securities  are  heavier  and  faster  than  can  be  easily 
absorbed,  and  it  is  probable  that  after  the  end  of  June  a  halt  will  be 


174 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


called  until  October  in  order  that  the  accumulations  of  securities  in 
the  hands  of  the  underwriters  may  be  disposed  of. 

In  May,  1913,  the  new  issues  have  reached  the  large  total  of  about 
£38,500,000,  in  comparison  with  £29,000,000  in  May  last  year  and 
£24,000,000  in  May,  191 1.  Of  the  £38,500,000  subscribed  for  this 
month  no  less  than  £17,000,000  had  been  for  government  loans,  con- 
sisting of  £10,670,000  for  Brazil  and  £6,675,000  for  China.  An 
exceptionally  large  amount  of  capital  has  been  asked  for  by  mis- 
cellaneous undertakings  of  various  kinds  and  descriptions. 

Table  II 

Destination  of  Capital  Subscribed  in  the  United  Kingdom  in  the  First 
Five  Months  of  the  Last  Two  Years 


First  Five  Months 


1913 


191 1 


United  Kingdom. 
India  and  Ceylon 
British  Colonies. , 
Foreign  countries 

Total 


£22,871,317 

2,902,467 

58,701,120 

62,915,546 


£25,021,776 

3,222,818 

25,582,782 

50,390,252 


£147,390,450 


£104,817,628 


The  purposes  for  which  capital  was  raised  in  the  United  Elingdom 
for  the  five  months  are  shown  in  Table  I. 

Three-fourths  of  the  new  capital  subscribed  has  been  for  foreign 
coimtries  and  the  bulk  of  the  remainder  has  been  for  the  United 
Kingdom.  The  destination  of  the  capital  subscribed  in  May  and  in 
the  first  five  months  of  the  past  two  years  is  shown  in  Table  II. 

Referring  to  the  causes  for  the  high  rates  that  railroads  and  other 
large  corporations  are  being  forced  to  pay  for  funds,  Henry  Clews  in 
his  current  market  letter  says: 

"The  controlling  influence  in  the  stock  market  is  the  money  situa- 
tion. By  this  is  meant  not  so  much  the  lack  of  ordinary  loaning 
facilities,  as  serious  inroads  upon  the  available  supply  of  capital. 
There  is  plenty  of  what  is  technically  known  as  money  in  the  country, 
but  the  demands  for  both  credit  and  capital  have  been  extraordinary 
for  several  years.  This  is  a  world-wide  phenomenon.  International 
trade  has  been  running  upon  an  unprecedented  scale.  Industrial 
development    has    progressed    marvelously    in    all    parts    of    the 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS  175 

world,  and  the  strain  upon  capital  thus  induced  was  seriously 
aggravated  by  the  losses  and  hoardings  of  the  Balkan  war.  We  have 
been  turning  capital,  which  comes  from  savings  only,  from  fluid  into 
fixed  forms  with  excessive  rapidity,  the  result  being  temporary 
scarcity  and  high  rates.  In  the  United  States  the  situation  has  been 
aggravated  by  home  conditions.  Trade  was  very  active,  and  there 
folio  sved  a  considerable  expansion  of  credit.  The  home  requirements 
for  capital  have  been  enormous.  They  have  been  held  in  restraint 
somewhat  by  recent  high  interest  rates — the  usual  warning  against 
excess.  It  is  well  known  that  many  important  issues  are  still  pending 
for  industrial,  railroad,  and  municipal  or  state  purposes.  These 
high  rates  forced  a  readjustment  of  market  values  to  new  conditions, 
and  the  low  rates  at  which  some  of  the  new  issues,  notably  St.  Paul 
and  Baltimore  &  Ohio,  have  been  placed,  focused  public  attention 
upon  the  difficulties  of  the  situation." 

49.    WHAT  IS  MEANT  BY  DEPRECIATION^ 

Depreciation  is  a  comparatively  new  phrase  in  railroad  accounting, 
and,  judging  from  the  articles  which  have  appeared  on  the  subject, 
there  seems  to  be  some  confusion  as  to  just  what  is  meant.  Does 
depreciation  mean  the  loss  of  value  in  a  car  or  an  engine  due  to  wear 
and  tear  ?  If  so,  this  sort  of  depreciation  is  amply  covered  by  proper 
maintenance;  in  other  words,"~it  is  usual  when  an  engine  or  car  goes 
into  the  repair  shop,  whether  damaged  in  an  accident  or  by  legitimate 
wear,  to  replace  its  worn-out  or  damaged  parts  and  restore  it  to  its 
original  condition.  Repairs  are  classed  as  "running  repairs,"  by 
which  are  meant  the  repairs  necessary  to  keep  equipment  in  safe 
running  condition;  and  "general  repairs,"  by  which  are  meant  the 
repairs  needed  to  restore  the  equipment  to  its  original  condition. 
There  are  plenty  of  cases  on  roads  both  in  this  country  and  in  Evurope, 
where  locomotives  and  cars  are  so  well  maintained  that  there  is  no 
appreciable  depreciation.  Indeed,  locomotives  are  running  on 
English  roads  which  are,  though  obsolete  in  many  respects,  as  good  as 
new,  though  fifty  years  old;  and  there  are  many  cases  upon  roads  in 
this  country  where  engines  and  cars  twenty-five  years  old  have  been  so 
well  maintained  that  they  are  as  good  as  when  originally  built. 

In  respect  to  buildings  and  other  structures,  their  ultimate  life 
depends   entirely   upon   the   character   of   maintenance   and   care. 

'Adapted  from  F.  A.  Delano,  "The  Application  of  a  Depreciation  Charge  b 
Railway  Accounting/ '/ottfwa/  of  Political  Economy,  XVI,  586-90  (November,  1908/. 


176 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Wooden  buildings  well  roofed  and  painted,  repaired  when  necessary, 
will  last  indefinitely,  and  of  course,  structures  of  masonry  or  iron  are 
even  more  permanent.  Buildings  and  structures  on  railroads  are 
rarely  discarded  except  because  they  have  outlived  their  usefulness, 
and  something  of  a  more  efficient  type  is  needed  in  their  place. 

From  the  foregoing  it  will  be  seen  that  if  by  depreciation  is  meant 
the  loss  due  to  wear  and  tear,  it  may  be  illustrated  as  to  each  piece  of 
equipmen{  or  each  building  or  structure,  by  a  mathematical  curve 
sometliing  like  that  indicated  in  the  accompanying  Diagram  I.  The 
distance  from  "A"  to  "B"  represents  the  period  of  time  in  which 
under  normal  conditions  the  deterioration  takes  place;  in  the  case  of 
locomotives,  say  three  years;  in  the  case  of  passenger  cars,  say  two 
years;  in  the  case  of  freight  cars,  a  very  variable  quantity,  averaging 

Diagram  I 

Curve  illustrating  condition  of  equipment,  buildings,  or  structures  over  a  long 
period  of  time.  Space  along  vertical  lines  represefits  value  of  equipment,  etc. 
Space  along  horizontal  lines  represents  time  interval 


100% 
80 
60 
40 


perhaps  three  years;  in  the  case  of  buildings  and  structures,  depending 
wholly  on  the  character  of  the  building  and  structure,  climatic  condi- 
tions, etc.  The  distance  from  "  A  "  to  "  C  "  represents  the  diminution 
in  value  due  to  wear  and  tear  down  to  the  point  where  it  becomes 
necessary  to  make  extensive  repairs.  This  is  one  view  of  what  is 
meant  by  depreciation. 

Another  view  of  depreciation  is  that  it  represents  the  amount  by 
which  the  average  condition  of  the  physical  property  has  deteriorated 
below  the  original  or  new  condition.  It  is  assumed  that  each  piece  of 
physical  property  on  the  railroad,  other  than  the  real  estate,  is 
depreciating  in  value  in  the  way  represented  by  the  curve  already 
drawn,  but  that  because  the  railroad  is  a  composite  of  an  immense 
number  of  imits,  the  average  condition  of  all  the  separate  units 
combined  is  represented  by  a  line  at  some  point  between  the  upper 
and  lower  nodes  of  this  curve.  Obviously,  this  will  vary  a  little  bit  on 
the  different  roads  according  to  the  personal  equation  of  management, 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS 


177 


local  conditions,  etc.,  which  in  turn  are  affected  by  good  or  bad 
business  conditions.  A  corporation  differs  from  an  individual  only  in 
degree.  In  good  times,  expenditures  for  maintenance  are  liberally 
made:  in  hard  times  all  expenditures  of  this  kind  which  can  be  safely 
postponed  necessarily  cease.  If  then  by  depreciation  is  meant  the 
drop  from  the  original  cost  down  to  the  average-condition  value  of 
equipment,  buildings  or  structiures,  it  is  evident  that  there  is  a  line,  or 
more  accurately,  a  band  or  zone  somewhere  between  100  per  cent  value 
and  the  50  per  cent  value,  and  this  band,  speaking  very  liberally,  will 
be  somewhere  between  60  per  cent  and  75  per  cent  of  the  original  cost. 
It  is  obvious,  however,  that  when  the  lower  limit  of  this  band  which 
represents  the  average  condition  of  the  units  is  reached,  depreciation 
does  not  continue  farther,  and  that  therefore  if  a  regular  fixed  charge 

Diagram  II 

The  result  of  composite  curves  similar  to  those  shown  below  is  a  line  or  more 
strictly  a  band  or  zone  representing  average  condition 


100% 


is  to  be  made  to  cover  this  alleged  loss  of  value  the  charge  should  cease 
at  that  point  as  the  limit  of  actual  depreciation  of  the  units  considered 
as  a  whole  has  been  reached. 

Still  a  third  view  of  depreciation  is  that  it  means  the  depreciation 
due  to  "obsolescence."  It  is  argued  that  while  each  piece  of  equip- 
ment or  every  building  or  structure  may  be  restored  to  its  original 
condition,  there  is  a  diminution  in  value,  due  to  obsolescence.  Every 
manufactiurer,  as  well  as  every  corporation,  fully  appreciates  this.  In 
a  country  which  is  developing  rapidly  it  is  frequently  necessary  to 
discard  perfectly  good  equipment,  buildings,  and  structures,  and  to 
replace  them  with  something  more  efficient.  It  is  possible  that  con- 
ditions will  warrant  "writing  off"  the  cost  of  such  equipment  or 
structures  and  charging  to  cost  of  operation  the  entire  cost  of  renewal 
with  more  modern  and  more  efficient  tools  or  equipment.  It  may  be 
argued  that  this  is  the  kind  of  depreciation  which  it  is  the  business  of 
the  railroad  to  provide  for  by  monthly  charge  in  its  operation.  The 
difficultv  is  to  estimate  the  rate  at  which  such  depreciation  takes  place. 


178 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


To  illustrate  it,  we  may  represent  such  a  depreciation  as  this  by  a 
mathematical  curve  for  each  piece  of  equipment,  building,  and  struc- 
ture, as  shown  in  Diagram  III.  The  difference  between  the  curve  in 
Diagram  III  and  that  of  Diagram  I  lies  in  the  fact  that  Diagram  III 
shows  a  depreciation  due  to  obsolescence,  whereas  Diagram  I  does  not. 
In  III  we  make  a  line  "A — D,"  which  is  at  a  slight  angle  to  the 
horizontal.  It  represents  the  rate  of  depreciation  due  to  .obsolescence. 
It  contemplates  that  every  time  a  unit  of  equipment,  a  building  or  a 
structure,  is  restored  to  a  condition  "  as  good  as  new,"  it  is  not  brought 

Diagram  in 

Diagram  showing  condition  of  equipment,  buildings,  and  structures  as  in  Diagram  I, 
but  taking  into  account  depreciation  due  to  obsolescence 
Rate  of  DEPREaAxioN  Due  to  Obsolescence 


too% 


80 


60 


40 


30 


back  to  a  value  equal  to  that  represented  by  its  original  cost,  but  to 
a  value,  as  much  less  than  its  original  cost  as  the  depreciation  due  to 
obsoleecence  may  have  brought  it.  To  provide  for  this  sort  of 
depreciation  it  is  obviously  necessary  to  determine  the  rate  of  deprecia- 
tioF.  due  to  obsolescence.  Who  shall  say  ?  Shall  we  be  guided  in  the 
future  from  the  results  in  the  past  ?  Shall  we  say  in  respect  to  loco- 
motives that  because  locomotives  are  now  as  high,  as  wide,  and 
perhaps  as  long  as  they  may  be  built,  there  can  be  no  further  develop- 
ments in  that  direction  ?  Or,  shall  we  accept  the  arguments  of  those 
who  believe  in  electric  transportation,  that  the  steam  locomotive  will 
soon  be  discarded  and  the  electrically  driven  motor  take  its  place  ? 
In  one  case,  the  rate  of  depreciation  due  to  obsolescence  will  be  small, 
while  in  the  other  case,  it  can  be  determined  only  by  our  surmise  as  to 
how  soon  the  revolution  from  steam  to  electricity  is  going  to  take  place. 


CAPITAL  GOODS  AS  ECONOMIC  FACTORS  179 

SO.  INROADS  OF  WAR  ON  THE  SAVABLE  FUND' 

It  would  seem  desirable  at  this  point,  now  that  all  feeling  in  regard 
to  the  subject  from  its  bearing  on  political  questions  has  apparently 
passed  away,  to  place  upon  record  the  exact  cost  of  the  war,  as  nearly 
as  the  same  can  be  determined.  With  this  object  attention  is  asked 
to  the  following  exhibit: 

The  amount    of    outstanding    national    indebtedness 

March  7,  1861,  was  $76,455,299.28. 
During  the  four  years  of  war  which  terminated  in  April, 

1865  (April  I,  1 86 1,  to  April  i,  1865),  the  actual 

receipts  of  the  treasury,  were  as  follows: 

From  internal  revenue $3i4>337>3i7 •  01 

From  customs 280,861,618.45 

From  lands 1,812,083.80 

From  direct  tax 4,668,259. 31 

From  miscellaneous  sources 74,120,413.37 

Total  receipts S67 5,799,691 .  94 

The  receipts  of  revenue  from  April  i,  1865,  to  June  30, 

1869,  inclusive,  during  which  period  the  larger  portion 

of  the  expenditures  has  been  directly  in  consequence 

of  the  war,  were  as  follows: 

From  internal  revenue $967,207,221 . 41 

From  customs 729,991,875.97 

From  lands 7,402,188. 28 

From  direct  tax 9,017,217.30 

From  miscellaneous  sources 194,949,122 .  13 

Total  receipts $1,908,576,625.09 

The  amount  of  outstanding  indebtedness,  less  cash  and 
sinking  fund  in  treasury,  June  30,  1869,  was  $2,489,- 
002,480.58. 

Deducting  from  this  the  amount  of  outstanding  in- 
debtedness at  the  outbreak  of  the  war  ($76,455,- 
299. 28),  we  have,  as  the  sum  borrowed  for  war  pur- 
poses and  not  repaid  out  of  the  receipts  above  in- 
dicated    $2,412,547,181.30 

making  the  total  expenditure  (loans  and  receipts) 
in  eight  and  a  quarter  years  of  war  and  its  effects  $4,996,914,498,  *$ 
Deducting  the  amount  which,  but  for  the  war,  might  be 
taken  as  the  average  expenditure  of  the  government 
during  this  period,  say  $100,000,000  per  annum 825,000,000.00 

We  shall  have $4,171,914,498.33 

*From  the  Report  of  the  Special  Commissioner  of  the  Revenue  (1869),  pp.  iv^^ 


l8o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

which  sum  represents  the  cost  of  the  war  to  the  United  States  govern 
mcnt  down  to  June  30,  1869. 

To  this  sum  should  be  added  the  value  of  the  pensions  now  paid 
by  the  government  on  account  of  the  war,  if  the  same  were  capitalized. 
This  at  eight  years'  purchase  of  the  present  annual  payment,  would 
amount  to  about  two  hundred  millions. 

But  this  aggregate,  however  large,  must  still  further  be  increased 
by  other  items  if  we  would  reach  the  true  cost  of  the  war  to  us  as  a 
people,  the  above  representing  only  the  expenditures  of  the  national 
government. 

These  additional  charges  are  substantially  as  follows: 

Increase  of  state  debts,  mainly  on  war  account $123,000,000.00 

County,   city,    and    town   indebtedness   increased   on 

account  of  the  war  (estimated) 200,000,000. 00 

Expenditures  of  states,  counties,  cities,  and  towns,  on 

account  of  the  war,  not  represented  by  funded  debt 

(estimated) 600,000,000. 00 

Estimated  loss  to  the  loyal  states  from  the  diversion  and 

suspension  of  industry,   and  the  reduction  of  the 

American  marine  and  carrying  trade 1,200,000,000.00 

Estimated  direct  expenditures  and  loss  of  property  by 

the  Confederate  states  by  reason  of  the  war 2,700,000,000. 00 

These  estimates,  which  are  believed  to  be  moderate  and  reasonable, 
show  an  aggregate  destruction  of  wealth,  or  diversion  of  industry, 
which  would  have  produced  wealth  in  the  United  States  since  1861 
approximating  nine  thousand  millions  of  dollars — a  sum  nominally 
in  excess  of  the  entire  increase  of  wealth,  as  returned  by  the  census 
for  the  whole  country  from  1850  to  i860. 

This,  then,  was  the  cost  of  the  destruction  of  slavery;  the  cost 
of  compromise;  the  cost  of  the  unfaithfulness  of  those  who  founded 
this  nation  to  the  idea  by  which  the  nation  lives.  What  does  it 
measure  ?  It  is  substantially  a  thousand  millions  a~  year  for  nine 
years;  or  at  the  wages  of  five  hundred  dollars  a  year,  the  labor  of 
two  millions  of  men  exerted  continuously  during  the  whole  of  that 
period.  It  is  three  times  as  much  as  the  slave  property  of  the  country 
was  ever  worth.  It  is  a  sum  which  at  interest  would  yield  to  the  end 
of  time  twice  as  much  as  the  annual  slave  product  of  the  South  in  its 
best  estate.' 

'  [Cf .  in  this  connection  the  charts  showing  federal  expenditure  and  the 
national  debt  (Selections  239  and  242). — Editors.) 


VI.    THE  ORGANIZATION  OF  INDUSTRY 

A.    SPECIALIZATION 
51.   LIMITATIONS  OF  THE  DIVISION  OF  LABOR* 

The  division  of  labor,  as  all  writers  on  the  subject  have  remarked, 
is  limited  by  the  extent  of  the  market.     It  can  only  be  advantageously 
carried  to  the  extent  which  will  produce  the  quantity  demanded.    The 
extent  of  the  market  may  be  limited  by  several  causes:  too  small  a 
population;    the  population  too  scattered  and  distant  to  be  easily 
accessible;    deficiency  of  roads  and  water  carriage;  or,  finally,  the 
population  too  poor,  that  is,  their  collective  labor  too  little  effective, 
to  admit  of  their  being  large  consumers.    Indolence,  want  of  skill, 
and  want  of  combination  of  labor,  among  those  who  would  otherwise 
be  buyers  of  a  commodity,  limit,  therefore,  the  practicable  amoimt  of 
combination  of  labor  among  its  producers.    In  an  early  stage  of  ci\dl- 
ization,  when  the  demand  of  any  particular  locality  was  necessarily 
small,  industry  flourished  only  among  those  who  by  their  command 
of  the  sea-coast  or  of  a  navigable  river,  could  have  the  whole  world,  or 
all  that  part  of  it  which  lay  on  coasts  or  navigable  rivers,  as  a  market 
for  their  productions.    The  increase  of  the  general  riches  of  the  world, 
when  accompanied  with  freedom  of  commercial  intercourse,  improve- 
ments in  navigation,  and  inland  communication  by  roads,  canals,  or 
railways,  tends  to  give  increased  productiveness  to  the  labor  of  every 
nation  in  particular,  by  enabling  each  locality  to  supply  with  its  special 
products  so  much  larger  a  market,  that  a  great  extension  of  the 
division  of  labor  in  their  production  is  an  ordinary  consequence. 

The  division  of  labor  is  also  limited,  in  many  cases,  by  the  nature 
of  the  employment.  Agriculture,  for  example,  is  not  susceptible  of  so 
great  a  division  of  occupations  as  many  branches  of  manufactures, 
because  its  different  operations  cannot  possibly  be  simultaneous. 
One  man  cannot  be  always  ploughing,  another  sowing,  and  another 
reaping.  A  workman  who  practiced  only  one  agricultural  operation 
would  be  idle  eleven  months  of  the  year.  The  same  person  may 
perform  them  all  in  succession,  and  have,  in  almost  every  climate,  a 
considerable  amount  of  unoccupied  time.    To  execute  a  great  agricul- 

'  Adapted  from  John  Stuart  Mill,  Principles  of  Political  Economy,  Book  I, 
chap.  viii. 

181 


1 82  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

tural  improvement,  it  is  often  necessary  that  many  laborers  should 
work  together;  but  in  general,  except  the  few  whose  business  is 
superintendence,  they  all  work  in  the  same  manner.  A  canal  or  a 
railway  embankment  cannot  be  made  without  a  combination  of  many 
laborers;  but  they  are  all  excavators,  except  the  engineer  and  a 
few  clerks. 

52.    THE  TIN-PEDDLER  AND  THE  DEVELOPMENT  OF  CON- 
NECTICUT INDUSTRIES' 

Among  the  factors  that  have  promoted  industry  in  New  England 
one  is  usually  overlooked,  namely,  the  service  rendered  by  the  Yankee 
tin-peddler  in  marketing  the  products  of  the  manufacturing  plants. 

In  Connecticut  few  places  outside  the  rich  river  valleys  where  the 
first  colonists  had  settled  gave  adequate  return  for  the  efforts  of 
farmers  in  tilling  the  thin,  rocky  soil.  The  settlers  were  thus  com- 
pelled to  find  employment  other  than  farming,  or  to  emigrate  to  lands 
more  generously  endowed  by  nature.  One  of  the  earliest  breaks 
from  the  traditional  occupation  of  agriculture  was  the  manufacture 
of  tinware.  This  industry  was  introduced  at  Berlin,  Conn.,  in  1740, 
by  two  Irish  immigrants,  the  brothers  William  and  Edward  Pattison, 
who  imported  sheet  tin  from  England  and  worked  it  into  kitchen 
utensils  at  their  Berlin  home.  Since  all  tinware  had  previously  been 
imported,  and  was  very  expensive,  the  brothers'  cheaper  articles 
found  ready  sale.  When  their  home  market  had  been  supplied,  they 
began  the  practice  of  making  journeys  on  foot  to  near-by  settlements, 
with  their  wares  carried  on  their  backs  in  a  sack.  The  success  of 
these  ventures  induced  other  Berliners  to  make  tin  and  carry  it  to 
neighboring  colonies.  At  first  the  journeys  were  made  on  foot,  then 
on  horseback,  and  finally  in  an  ingeniously  arranged  wagon.  As  the 
country  opened,  and  turnpikes  and  canals  were  built,  the  peddler's 
wagon  traveled  farther  and  farther  from  home.  Gradually  a  dis- 
tributing organization  was  perfected  that  reached  every  village  and 
remote  hamlet. 

As  an  industry,  tin  manufacturing  was  too  simple  to  become  very 
important,  although  it  continued  in  Connecticut  until  1850.  But  the 
seUing  organization  built  up  for  tin  was  very  important  becavise  it 
provided  an  adequate  outlet  for  other  indxistries  in  which  the  manu- 

» Adapted  from  a  note  by  R.  Malcolm  Keir  in  The  Journal  of  Political 
Economy,  XXI,  255  (March,  1913). 


THE  ORGAmZATION  OF  INDUSTRY  183 

facturing  processes  were  not  simple,  and  which  employed  more  and 
more  men  at  home.  It  was  in  building  up  these  industries  that  have 
been  permanent  valuable  assets  to  the  state,  by  enabling  the  products 
of  the  industries  to  reach  their  markets,  that  the  peddler's  great 
service  was  rendered.  Lack  of  transportation  was  the  greatest  natural 
throttle  to  early  American  manufactiuing.  Carrying  charges  soon 
ate  up  any  profits  an  industry  might  have,  and  limited  it  to  a  very 
narrow  local  field.  However,  if  those  products  were  small  in  bulk, 
with  a  relatively  high  value  and  a  brisk  demand,  transportation  diflS- 
culties  were  solved  by  placing  the  articles  in  the  hands  of  the  peddler. 
If  there  had  been  no  peddler  there  would  have  been  no  way  for  the 
producers  of  the  goods  to  reach  the  consumers,  and  hence  no 
production. 

Today  the  peddler  is  seldom  seen.  Railroads  and  cross-coimtry 
trolley  freight  lines  have  driven  him  out  of  existence.  In  remote 
communities  occasionally  he  may  be  met.  In  his  time  he  rendered 
the  service  of  transportation  agent  and  salesman,  linking  scattered 
consumers  to  producers  and  giving  to  incipient  manufacture  the 
opportunities  of  a  widened  market.* 

S3.    CLASSIFICATION  OF  OCCUPATIONS 

The  following  schemes  of  classification,  from  the  Index  to  Occupa^ 
tions  issued  by  the  United  States  Bureau  of  the  Census,  indicate  the 
method  of  classification  which  has  been  adopted  for  the  Census  of  1910. 

i.    iltoustries  and  industrial  groups' 

(a)    extractive  industries 

I.  Agriculture,  Forestry,  and  Animal  Husbandry: 
Agriculture 
Forestry 
Animal  husbandry 

11.  Extraction  of  Minerals: 

Mining 
Coal  mines 
Copper  mines 
Gold  and  silver  mines 

'[On  this  topic  see  also  Selection  74:  "Widening  of  the  Market  Through 
Improved  Transportation." — Editors.] 

'  From  the  Classified  Index  to  Occupations,  Thirteenth  Census  of  the  United 
States  (1910),  pp.  vi-viii. 


1 84  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Iron  mines 

Lead  and  zinc  mines 

Other  mines 

Mine  workers  (mine,  not  specified) 
Quarrying 

Quarries  (stone,  cement,  sand,  clay,  etc.) 
Production  of  salt,  oil,  and  natural  gas 

Production  of  salt 

Production  of  oil  and  natural  gas 

(b)    industries  of  transformation,  transportation,  and  trade 

III.  Manufacturing  and  Mechanical  Industries: 
Building  trades 

(Listed  as  building  and  hand  trades  under  Miscellaneous  industrie-. 
Chemicals  and  allied  products 

Fertilizer  makers 

Paint  makers 

Powder,  cartridge,  dynamite,  fuse,  and  fireworks  makers 

Soap  makers 

Other  chemical  workers 
Clay,  glass,  and  stone  products 

Brickmakers 

Potteries 

Tile  makers 

Glass 

Terra-cotta  workers 

Lime,  cement,  and  gypsum 

Marble  and  stone  cutters 
Clothing 

Clothing  makers  (suits,  coats,  cloaks,  and  overalls) 

Clothing  makers  (other  than  suits,  coats,  cloaks,  and  overalls) 

Corset  makers 

Glove  makers 

Hat  makers  (wool  or  felt) 

Shirt,  collar,  and  cuff  makers 
Food  and  kindred  products 

Bakeries 

Butter  and  cheese  makers 

Candy 

Fish  curers  and  packers 

Flour  and  grain  mills 

Fruit  and  vegetable  canners,  picklers,  and  preservers 

Slaughter  and  packing  houses 


THE  ORGANIZATION  OF  INDUSTRY  185 

Sugar  makers  and  refiners 

Other  food  preparers  _ 

Iron  and  steel  and  their  products 

Agricultural  implements 

Automobile  factories 

Car  and  railroad  shops 

Foundries  and  metal  wprking 

Iron  and  steel  mills 

Ship  and  boat  building 

Wagons  and  carriages 

Other  iron  and  steel  workers 
Leather  and  its  finished  products 

Harness  and  saddle  makers  and  repairers 

Leather-belt,  leather-case,  and  pocketbook  makers 

Shoes 

Tanneries 

Trunk  makers 
Liquors  and  beverages 

Breweries 

Distilleries 

Other  liquor  and  beverage  workers 
Lumber  and  its  remanufacture 

Box  makers  (wood) 

Furniture 

Pianos  and  organs 

Saw  and  planing  mills 

Other  woodworkers 
Metals  and  metal  products  except  iron  and  steel 

Brass  mills 

Clock  factories 

Copper  factories 

Gold  and  sUver  workers 

Jewelry  factories 

Lead  and  zinc  factories 

Tin-plate  factories 

Tinware  factories 

Watch  factories 

Other  metal  workers 
Paper 

Box  makers  (paper) 

Makers  of  blank  books,  envelopes,  tags,  paper  bags,  etc. 

Paper  mills 

Pulp  mills 


lS6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Printing  and  bookbindin;; 

Printing  and  publishing  establishments 
Textiles 

Carpet  mills 

Cotton  mills 

Dyeing  and  finishing  textiles 

Hemp  and  jute  mills 

Knitting  mills 

Lace  and  embroidery  makers 

Linen  mills 

Print  works 

Rope  and  cordage  factories 

Sail,  awning,  and  tent  makers 

Silk  mills 

Woolen  mills 

Worsted  mills 

Not  specified  textile  workers 
Miscellaneous  industries 

Broom  and  brfffeh  makers 

Button  makers 

Charcoal  and  coke  burners 

Cigars 

Electric  light  and  power  companies 

Electrical  supplies 

Gas  works 

Oil  works 

Rubber  factories 

Straw  workers 

Tobacco 

Turpentine  distillers 

Building  and  hand  trades 

Other  miscellaneous  industries  and  occupations 

Workers    in    "Not    specified"    manufacturing    and    mechanical 

industries 

IV.  Transportation: 
Water  transportation 

Water  transportation 
Road,  street,  and  bridge  transportation 

Construction  and  maintenance  of  streets,  roads,  sewers,  and  bridges 

Livery  stables 

Truck,  transfer,  cab,  and  hack  companies 

Street  railways 
Transportation  by  railroad 

Transportation  by  railroad 


THE  ORGANIZATION  OF  INDUSTRY  187 

Express  companies 

Express  companies 
Post,  telegraph,  and  telephone 

Post 

Telegraph  and  telephone 
Other  persons  in  transportation 

Other  persons  in  transportation 

V.  Trade: 

Banking  and  brokerage 

Insurance 

Real  estate 

Wholesale  and  retail  trade 

Elevators 

Stock  yards 

Warehouses  and  cold-storage  plants 

Other  persons  in  trade 

Clerical  assistants 

(C)      SERVICE 

VI.  Public  Service  (not  Elsewhere  Classified): 
Public  administration 
Federal  officials  and  employees 
State  officials  and  employees 
County  officials  and  employees 
City  or  town  officials  and  employees 
Public  defense  and  maintenance  of  law  and  order 
National  defense 

Army 

Navy 
Maintenance  of  law  and  order 

United  States  marshals 

County  sheriffs 

City  marshals 

Constables 

Detectives 

Guards  in  parks,  prisons,  public  institutions,  and  public  buildings 

Policemen 

Probation  and  truant  officers 

Watchmen 

VII.  Professional  Service: 
(Whole  class) 

VIII.  Domestic  and  Personal  Service: 
Occupations  not  in  industries 
Laundries  and  laundry  work 


i88 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


II.    Division  of  Labor  within  a  Typical  Industry- 
Mills' 


-Cotton 


Manufacturers  and  pro- 
prietors 

Officials 

Managers  and  superin- 
tendents 

Foremen  and  overseers 

Clerks 

Apprentices 

Back  boys 

Bailers 

Banders 

Beaders 

Beamers 

Bobbin  boys 

Breaker  hands 

Card  clothiers 

Card  fixers 

Card  grinders 

Card  strippers 

Carders 

Carpenters 

Chainers 

Cleaners 

Cloth  balers 

Cloth  cutters 

Cloth  menders 

Cloth  steamers 

Combers 

Cotton  shakers 

Creelers 

Designers 

Doffers 


Uoublcrs 
Drawers-in 

Drawers  and  drawing- 
frame  tenders 
Dressers 
Drillers 
Dryers 
Dyers 
Engineers 
Filling  carriers 
Finishers 
Folders 

Harness  brushers 
Harness  makers 
Helpers 
Inspectors 
Jack-frame  tenders 
Laborers 
Lappers 
Loom  fixers 
Machinists 
Nappers 
Oilers 
Packers 
Pickers 
Piecers 
Pressmen 
Printers 
Quillers 
Reelers 
Ribbers 


Roll  coverers 

Rollers  (cloth) 

Ropers 

Rovers 

Roving-frame  tenders 

Scrubbers 

Section  hands 

Sewers  and  Seamers 

Shearers 

Sizers 

Slasher  tenders 

Slubber  tenders 

Sorters 

Spare  hands 

Speeders 

Spinners 

Spoolers 

Spool  fixers 

Stampers 

Starchers 

Sweepers 

Trimmers 

Twisters 

Warpers 

Washers 

Weavers 

Winders 

Wrappers 

Yarn  pourers 

Other  occupations 

Not  specified 


The  several  occupations  as  shown  in  Classification  II  are  subject 
to  still  further  division. 

Thus  the  item  "Laborers"  is  subdivided  as  follows: 


Laborer,  room,  cotton  mill 
Laborer,  thread  mill  (cotton) 
Laborer,  wadding  mill  (cotton) 
Opener,  cotton  bale 
Trucker,  cloth,  cotton  mill 
Trucker,  cotton  mill 


Day  laborer,  cotton  mill 

General  hand,  cotton  mill 

Laborer,  bleaching  (cotton) 

Laborer,  cotton  mill 

Laborer,  cotton  waste 

Laborer,  finishing  company  (cotton) 

Laborer,  gingham  mill  (cotton) 

It  is  estimated  that  the  Census  Index  designates  in  the  aggregate 
between  7,000  and  8,000  distinct  occupations. 

'  From  the  Classified  Index  to  Occupations,  Thirteenth  Census  of  the  United 
States  (1910),  pp.  211-18. 


THE  ORGANIZATION  OF  INDUSTRY 


189 


^4.    STAGES  IN  THE  PRODUCTION  OF  IRON  AND  STEEL 

PRODUCTS' 

An  idea  of  the  sequence  of  the  stages  in  the  production  of  iron 
and  steel  commodities  may  be  obtained  from  the  following  diagram : 


Blooms 


Ingots 


Ore  1    § 

Coke  }  <^ 

Limestone  J   .Sf 


Steel-making 

iron: 

Bessemer 

Basic 


Slabs 


Large  billets 


Rods  /W"'^'  ^"■^  nails,  and  wire 

I    products 
Merchant  bars 
Angle  bars 
SpUce  bars 
Hoops  and  bands 

I  Merchant  bars 
Stonti^^ 
Seamless  tubes 

(Sheets,  galvanized  and  other  fin- 
ished 
Black  plate  for  /Tin    plate    and 
tinning  \    tern  plate 

Rails 

Structural 
shapes: 
Beams 
Channels 
Angles 
Tees 
Zees 

Axles 


Plates: 
Structural 
Boiler 

Skelp 


Bridge  and  other  fabricating  ma- 
terial 


Wrought  pipe  and  tubing 


Castmgs  Forgings 
Foundry  iron    Castings 
Malleable  Bessemer  iron  Castings 

Forge  iron      Muck  bar  Merchant  bar  iron  and  other  rolled-iron  products 


Malleable  castings 


55.   THE  LOCALIZATION  OF  MANUFACTURING  INDUSTRIES' 

Some  of  the  various  advantages  which  influence  the  locaHzation 
of  industries  may  be  stated  as  follows:  (1)  nearness  to  materials; 
(2)  nearness  to  markets;  (3)  water-power;  (4)  a  favorable  climate; 
(5)  a  supply  of  labor;  (6)  capital  available  for  investment  in  manu- 
factures; (7)  the  momentum  of  an  early  start;  (8)  the  habit  of 
industrial  imitation;  (9)  economic  advantages  of  specialized  centers. 

I.  Nearness  to  materials. — The  localization  of  several  of  the  indus- 
tries illustrates  this  advantage — the  paper  industry  near  the  spruce 

'  From  the  Report  of  the  United  Stales  Commissioner  of  Corporations  on  the 
Steel  Industry,  Part  III  (1913),  P-  i3- 

'  Adapted  from  the  Twelfth  Census  of  the  United  States  (1900),  Vol.  VII,  pp. 
ccx-codv. 


IQO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  poplar  forests;  the  tanning  industry  near  the  chief  tanning 
materials;  slaughtering  and  meat-packing  near  the  stock-raising 
centers;  the  manufacture  of  agricultural  implements  near  the  great 
hardwood  forests  and  the  iron-producing  centers;  the  pottery  in- 
dustry near  its  clay;  the  recent  growth  of  cotton  manufacturing 
near  the  cotton  fields;  and  the  beginnings  of  shoe  manufacturing 
in  Massachusetts  near  the  supply  of  leather. 

Fuel  is  regarded,  for  census  purposes,  as  a  material  of  manufacture, 
and  the  influence  of  its  supply  is  very  marked  in  the  localization  of 
the  glass  industry  near  the  natural  gas  wells,  and  in  the  iron  industry 
in  Pennsylvania  and  Alabama. 

2.  Nearness  to  markets. — This  is  an  important  factor  in  the  locali- 
zation of  all  industries,  its  influence  upon  the  localization  of  manu- 
factvuing  in  general  being  especially  apparent.  Nearly  48  per  cent 
of  the  manufacturing  of  the  country  is  in  Massachusetts,  Connecticut, 
Rhode  Island,  New  York,  New  Jersey,  and  Pennsylvania — not  so 
much  because  there  is  better  water-power  or  more  abundant  material 
for  manufactures  in  these  states,  but  very  largely  because  the  greatest 
population  was  there  when  the  manufacturing  developments  of  the 
country  began.  The  influence  of  the  market  in  causing  a  migration 
of  manufacturing  in  general  may  be  observed  by  comparing  the 
movement  of  the  center  of  manufactures  and  of  the  center  of 
population  since  1850.  The  center  of  manufactures  has  moved 
steadily  westward,  following  roughly  the  movement  of  the  center 
of  population. 

Eight  of  the  fifteen  selected  industries'  are  localized  east  of  the 
Alleghenies,  chiefly  because  they  became  established  in  this  section  at 
a  time  when  it  was  the  only  important  market  in  the  country.  In 
certain  of  the  industries  the  influence  of  the  market  upon  the  locali- 
zation has  been  especially  marked,  i.e.,  the  iron  and  steel  industry 
in  Illinois,  the  manufacture  of  agricultural  implements,  the  paper 
and  pulp  manufacture,  and  the  jewelry  and  silk  industries. 

Nearness  to  materials  and  nearness  to  markets,  in  so  far  as  these 
expressions  are  used  with  reference  to  an  effect  upon  localization, 

'These  industries  are:  (i)  agrioiltural  implements;  (2)  boots  and  shoes, 
factory  product;  (3)  collars  and  cuffs;  (4)  cotton  goods,  including  small  cotton 
wares;  (5)  fur  hats;  (6)  glass;  (7)  hosiery  and  knit  goods;  (8)  iron  and  steel; 
(9)  jewelry;  (10)  leather  gloves  and  mittens;  (11)  leather,  tanned,  curried,  and 
finished;  (12)  paper  and  wood  pulp;  (13)  pottery,  terra  cotta,  and  fire-clay  prod- 
ucts; (14)  silk  and  silk  goods;  (15)  slaughtering  and  meat-packing,  wholesale. 


THE  ORGANIZATION  OF  INDUSTRY  191 

mean  more  than  mere  geographical  distance.  They  include  the 
general  accessibility  to  materials  or  markets,  affected  as  this  is  by  the 
supply  or  lack  of  good  and  cheap  means  of  communication.  Water- 
ways have  thus  had  a  tremendous  influence  upon  the  localization  of 
industries,  for  they  have  allowed  localities  through  which  they  passed 
to  make  an  early  start  in  manufacturing,  and  by  the  momentum  thus 
acquired  to  retain  their  prominence  in  many  cases,  even  after  the 
building  of  railroads  has  removed  the  special  advantages  which  they 
at  first  possessed. 

It  is  evident,  moreover,  that  the  importance  of  the  two  advantages 
just  explained  varies  greatly  among  the  several  industries  according  as 
their  products  are  easily  and  cheaply  transportable  or  are  transported 
only  with  great  difficulty  and  at  a  great  expense.  In  all  industries 
where  the  product  is  not  transportable,  such,  for  example,  as  the 
construction  of  houses,  the  market  controls  the  localization  absolutely. 
It  is  plain,  also,  that  the  power  of  materials  and  market  over  industry 
is  less,  just  in  proportion  as  the  materials  and  products  are  more 
easily  and  more  cheaply  shipped.  From  the  manufacturer's  stand- 
point it  is  always  a  counting  of  the  costs  of  shipment.  If  these  are 
heavy,  the  industry  tends  to  locate  where  the  amount  of  transporta- 
tion will  be  least,  but  if  they  are  light,  the  influence  of  materials  and 
market  is  so  slight  that  it  often  disappears  altogether.  The  words 
"heavy"  and  "light,"  as  used  in  this  connection,  are  not  to  be  under- 
stood in  an  absolute  sense,  but  relative  to  the  value  of  the  material 
or  product  transported.  A  cheap  and  heavy  raw  material,  such  as 
clay,  will  be  carried  only  a  very  short  distance.  Transportation 
charges,  after  a  few  hundred  miles,  would  constitute  too  large  a  part 
of  the  cost  of  manufacture.  But  an  equal  weight  of  this  same  clay 
after  its  value  has  been  trebled  by  being  converted  into  pottery  might 
be  carried  a  long  distance  before  the  shipping  costs  would  become 
prohibitory. 

3.  Water-power. — ^This  has  been  in  the  past  a  very  important 
advantage,  but  today  its  influence  upon  localization  of  industries  is 
not  very  apparent.  Naturally,  this  influence  was  greatest  before 
the  days  of  steam.  All  industries  requiring  power  grouped  them- 
selves along  those  waterways  which  had  a  good  natural  fall.  This 
early  impetus,  combined  with  forces  to  be  described  later,  has  tended 
to  perpetuate  such  industries  in  their  original  locations,  even  when 
steam  has  become  more  important,  as  a  soxirce  of  power,  than 
water. 


192  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

It  is  interesting  in  this  connection  to  compare  the  manufacture 
of  cotton  goods  with  the  manufacture  of  shoes.  Power  has  been 
applied  to  some  branches  of  the  cotton  manufacture  for  more  than  a 
hundred  years,  while  shoe  manufacturing  has  been  a  power  industry 
less  than  half  that  time.  Largely  as  a  result  of  this  fact,  water 
supplies  31  per  cent  of  the  power  used  in  the  cotton  industry  today, 
and  but  4 . 6  per  cent  of  that  used  in  the  manufacture  of  shoes.  That 
is  to  say,  the  localization  of  both  industries  began  in  the  early  days, 
but  the  manufacture  of  shoes,  being  for  years  a  hand  industry,  was 
independent  of  water-power,  while  the  cotton  manufacture,  of  neces- 
sity, sought  the  waterways.  When  the  necessity  for  power  in  the 
shoe  manufacture  arose,  the  industry  was  too  thoroughly  established 
away  from  the  sources  of  water-power,  and  recourse  was  had  to  steam. 
Water-power  has  been  an  important  factor  in  the  localization  of  three 
of  the  other  industries  specified  above — silk  goods,  hosiery,  and  knit 
goods,  and  the  pulp  manufacture. 

4.  A  favorable  climate. — This  has  also  an  influence  which  is  dis- 
cernible in  the  localization  of  industries.  The  influence  of  a  moist 
climate,  which  is  also  even  throughout  the  day,  upon  cotton  spinning 
in  New  Bedford  and  Fall  River,  Mass.,  is  a  conspicuous  instance. 
More  often,  however,  the  advantage  of  a  favorable  climate  makes 
itself  felt  through  its  invigorating  effect  on  labor. 

5.  A  supply  of  labor. — Two  other  advantages  must  be  mentioned, 
for  there  are  times  when  they  have  considerable  weight.  These  are 
the  supply  of  labor  and  the  supply  of  capital  and  credit  facilities. 
The  "supply  of  labor"  is  something  far  from  mobile.  It  is  very 
human,  with  all  the  attachments  of  home  and  friends.  It  can  be 
easily  lured  into  a  new  industry  which  is  established  "at  home"  or 
near  by,  but  the  wages  paid  must  be  considerably  greater  to  attract 
it  into  other  sections.  Manufacturing  industries  tend,  therefore,  to 
become  established  in  a  section  where  there  is  a  good  supply  of  labor. 
The  New  England  towns  have  been  pre-eminently  of  this  t)^e.  All 
about  them  were  farms  which  had  reached  the  point  of  exhaustion, 
and  could  therefore  employ  profitably  only  a  small  part  of  the  rising 
generation.  The  surplus  labor  thus  created  gravitated  naturally  to 
the  nearest  town  in  search  of  employment,  and  the  early  development 
of  numerous  manufactures  was  thus  made  easy.  For  opposite  reasons 
there  can  be  no  extensive  manufacture  in  those  parts  of  the  West 
where  the  increasing  population  is  mostly  absorbed  in  agriculture, 
which  is  still  incompletely  developed. 


THE  ORGANIZATION  OF  INDUSTRY"  193 

6.  A  supply  of  capital. — It  is  almost  equally  important  to  have  a 
supply  of  local  capital.  Although  most  large  enterprises  are  now 
financed  from  the  great  financial  centers,  the  plants  are  located  usually 
in  places  which  have  already  become  industrial  centers  in  a  smaller 
way  through  the  efforts  of  the  people  there,  and  by  means  of  their 
money.  The  cotton  mills  which  are  springing  up  through  the  South 
just  now  illustrate  the  tendency  of  a  town  to  own  itself  in  the  early 
stages  of  its  industrial  life,  and  Fall  River  affords  a  most  remarkable 
illustration  of  the  perseverance  of  this  tendency.  A  prosperous  town, 
therefore,  where  the  people  are  "making  money,"  is,  in  so  far,  a 
favorable  locality  for  the  establishment  of  manufacturing  industries 
of  some  sort.  Outside  capital  will  undoubtedly  be  solicited,  but  it 
will  be  obtained  more  easily  and  more  surely  after  the  people  them- 
selves "have  taken  largely  of  the  stock."  Banking  facilities  exert  a 
similar  influence,  making  the  community's  capital  more  available  for 
investment  than  it  would  otherwise  be.  All  of  these  considerations 
have  operated  to  favor  the  early  development  of  manufacturing  cen- 
ters in  New  England  and  the  Middle  Atlantic  states,  agriculture 
absorbing  a  large  share  of  the  available  local  capital  in  the  southern 
and  western  states.  One  of  the  causes  which  led  to  the  establishment 
of  the  cotton  manufacture  in  New  Bedford  about  1850  was  the  supply 
of  local  capital  set  free  about  that  time  by  the  decline  in  the  whaling 
industry. 

7.  The  momentum  of  an  early  start. — The  various  advantages 
which  have  been  described  thus  far  can  be  expressed  in  dollars  and 
cents.  The  places  possessing  these  advantages  attract  manufacturers 
on  account  of  the  comparatively  low  cost  there  of  producing  and 
marketing  goods.  But  these  advantages,  in  almost  all  cases,  account 
for  localization  only  in  its  broader  sense.  They  prescribe  an  industry's 
possible  area,  but  they  fail  to  explain  the  most  marked  form  of 
localization — that  within  a  single  city  or  town,  or  group  of  cities 
and  towns. 

Somewhere  within  the  possible  area — made  such  because  of  the 
advantages  just  described — an  enterprising  man  started  the  pioneer 
establishment  of  a  certain  industry.  Why  was  this  place  chosen 
rather  than  any  other  within  the  possible  area?  Or  why  was  this 
industry  chosen  rather  than  any  other  for  which  this  place  was  suited  ? 
This  is  the  first  problem,  and  the  second  follows  naturally:  Why, 
after  the  first  factory  had  become  established,  was  it  to  the  advantage 
of  competitors  to  choose  the  same  spot  for  their  establishments,  rather 


194  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

than  other  localities  within  the  possible  area?  The  solution  of  the 
first  problem  in  the  case  of  any  industry  is  to  be  found  by  reference 
to  its  early  history  in  this  country. 

In  most  cases  it  will  be  found  that  the  original  establishment  of 
an  industry  in  a  locality  was  largely  a  matter  of  chance.  The  shoe 
industry  in  Lynn,  Mass.,  is  a  case  in  point.  In  the  early  colonial 
days  this  settlement  had  its  quota  of  cobblers,  who  made  as  well  as 
repaired  the  shoes  for  the  region  thereabout,  but  did  not  attempt  a 
broader  market.  In  1750,  however,  John  Adams  Dagyr,  a  Welshman 
and  a  skilled  shoemaker,  settled  in  Lynn,  and  began  to  teach  his 
apprentices  the  art  of  fine  shoemaking.  It  soon  became  known  that 
shoes  were  being  made  in  Lynn  nearly  as  good  as  the  best  made 
abroad,  and  as  early  as  1764  Dagyr  was  spoken  of  in  a  Boston  news- 
paper as  "the  celebrated  shoemaker  of  Essex."  Had  this  man  settled 
in  Roxbury,  Mass.,  rather  than  Lynn,  the  bias  toward  shoe  manufac- 
turing might  have  become  established  in  that  quarter,  and  Roxbury 
instead  of  Lynn  might  today  be  one  of  the  three  great  shoe  centers 
of  the  United  States. 

The  nature  of  many  a  city's  industry  has  been  shaped  in  just  this 
way,  in  the  early  days  of  its  history,  by  the  decision  of  one  man. 
Instances  of  this  might  be  cited  in  connection  with  the  localization 
of  collars  and  cuffs,  hosiery  and  knit  goods,  jewelry,  gloves,  and 
fur  hats. 

The  decision  of  the  pioneer  in  an  industry  at  a  given  point  rests 
on  various  grounds.  He  establishes  usually  an  industry  with  which 
he  is  familiar  because  of  experience  obtained  elsewhere.  Several  of 
the  above  selected  industries  have  been  established  in  their  respective 
localities  by  the  emigration  from  Europe  of  individual  skilled  work- 
men or  groups  of  skilled  workmen.  The  town  where  such  a  man 
chances  to  settle  is  taken  for  a  location  of  the  industry,  in  most  cases, 
without  much  questioning  whether  or  not  it  is  better  adapted  for  it 
than  any  other  town.  But  if  he  searches  for  a  suitable  place,  his 
chance  acquaintance  with  one  locality,  or  the  offer  of  a  friend  to  assist 
him  if  he  establishes  there,  often  influences  his  decision  at  the  expense 
of  another  and  perhaps  more  suitable  locality  where  he  has  never 
visited,  or  where  no  acquaintance  appeared  to  offer  inducements. 
In  many  instances  towns  offer  inducements  to  manufacturers,  such 
as  exemption  from  taxation  for  a  period  of  years,  and  such  efforts 
have  often  been  successful  in  building  up  an  entirely  new  industry  in 
the  town. 


THE  ORGANIZATION  OF  INDUSTRY  195 

But,  if  the  industry  is  to  be  perpetuated  and  to  increase  in  the 
locality,  the  original  establishment  must  succeed,  for  it  is  the  influence 
of  its  success  which  causes  other  establishments  to  spring  up  around 
it.  In  the  early  history  of  every  industry  numerous  enterprises  fail, 
not  so  much  because  of  the  unfitness  of  the  locality  chosen,  as  because 
of  the  unfitness  of  the  man  who  attempts  to  carry  on  the  industry  at 
that  point. 

8.  The  habit  of  industrial  imitation, — ^It  is  only  after  the  first 
enterprise  has  succeeded  in  any  locality  that  the  real  localizing 
process  begins.  The  mainspring  of  this  process  is  the  habit  of  indus- 
trial imitation — a  habit  as  powerful  as  it  is  universal,  and  so  impor- 
tant in  this  connection  that  it  warrants  a  somewhat  closer  analysis. 

It  has  been  shown  above  that  one  of  the  normal  requisites  of  an 
industrial  locality  is  a  good  supply  of  local  labor  and  local  capital. 
Suppose  the  enterprising  man  establishes  himself  in  such  a  community 
and  succeeds  there.  His  success  proves  that  the  economic  conditions 
are  favorable — that  he  is  within  the  possible  area  of  that  industry. 
But  it  does  more,  it  creates  a  local  bias  toward  this  particular  industry. 
This  bias  affects  all  three  classes  necessary  to  its  expansion:  entre- 
preneurs, capitalists,  and  laborers. 

In  the  first  place  entrepreneurs  naturally  choose  the  existing 
industry  rather  than  establish  a  new  one.  On  the  assumption  of  a 
prosperous  and  growing  town,  there  is  continually  arising  a  class  of 
enterprising  men  who  wish  to  embark  in  manufacturing  for  them- 
selves, and  they  naturally  choose  an  industry  with  which  they  are 
familiar — one  which  they  have  actually  seen  succeed.  It  requires 
courage  to  be  an  industrial  pioneer;  more  courage,  in  fact,  than  most 
men  possess.  They  have  read,  perhaps,  of  much  larger  profits  being 
made  in  branches  of  manufacturing  not  carried  on  in  their  neighbor- 
hood; they  may  have  visited  towns  in  another  part  of  the  country 
where  some  such  industry  has  been  very  successful,  and  they  are 
tempted  to  establish  this  industry  in  their  town,  rather  than  to  imi- 
tate the  establishment  which  has  been  operating  there  successfully. 
The  chances  are  great,  however,  that  they  will  resist  the  temptation 
of  larger  profits  in  favor  of  what  they  regard  as  surer  profits,  and  will 
choose  the  local  industry.  The  other  industry  may  be  just  as  safe, 
but  the  probability  of  success,  if  they  follow  the  beaten  path,  has  been 
emphasized  to  them  each  day  as  they  have  watched  the  smoking 
chimney  of  the  local  factory,  and  have  noticed  the  rise  of  the  pro- 
prietor from  moderate  circumstances  to  comparative  affluence.    Theii 


196  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

choice  of  this  industry  becomes,  therefore,  almost  inevitable.  More- 
over, it  is  probable  that  the  men  who  thus  launch  out  for  themselves 
have  been  employees  or  foremen  in  the  local  factory.  They  are  rela- 
tives, perhaps,  of  the  proprietor,  and  are  familiar  with  all  the  details 
of  this  industry,  while  in  any  other  they  would  have  all  to  learn. 
This  last  feature  has  been  illustrated  in  fully  half  of  the  industries 
specified  above. 

In  the  second  place,  the  capital  needed  to  finance  the  new  estab- 
lishment—in addition  to  that  supplied  by  the  new  entrepreneur  him- 
self— is  much  more  easily  obtained  if  the  new  establishment  is  to 
produce  the  same  line  of  goods  as  the  one  already  in  existence.  If  a 
loan  is  desired  for  the  establishment  of  an  outside  and  less  familiar 
industry,  there  is  naturally  a  raising  of  the  interest  rate  as  a  means  of 
insurance;  or  the  stock,  if  offered  for  sale,  will  for  the  same  reason 
sell  at  a  lower  figure.' 

In  the  third  place,  the  best  grade  of  local  labor  prefers  to  have 
employment  in  an  industry  which  seems  to  offer  a  future  rather  than 
in  one  which  seems  in  the  nature  of  an  experiment.  This  influence 
is  comparatively  slight,  however,  for  all  ordinary  labor  takes  such 
employment  as  is  offered  without  much  questioning. 

9.  Economic  advantages  of  specialized  centers. — All  the  above  deci- 
sions— the  decision  of  the  pioneer  in  the  industry,  and  the  decisions 
of  the  few  who  follow  immediately  in  his  steps — seem  to  be  made  with 
but  little  consideration  of  the  economic  advantages  which  the  locality 
chosen  may  possess  for  carrying  on  the  industry  in  question,  i.e.,  the 
possibility  of  producing  cheaper  at  this  point  than  elsewhere,  or  being 
better  able  there  to  market  the  products.  Very  quickly,  however, 
certain  decided  economic  advantages  emerge.  Workmen,  skilled  in 
the  specialty  for  which  the  center  begins  to  be  known,  flock  there  and 
wait  their  chance  "to  be  taken  on  at  one  of  the  mills."  In  many 
cases  an  immigration  of  skilled  labor  from  corresponding  centers 
abroad  sets  in.  East  Liverpool,  Ohio,  was  at  one  time  chiefly  an 
English  town  as  the  result  of  such  immigration.    A  pool  of  specially 

'  The  opposition  of  the  manufacturer  or  the  manufacturers  already  established 
in  the  industry  must,  however,  be  counted  on  in  many  cases,  especially  if  the 
products  made  are  for  sale  in  a  comparatively  limited  markets  As  far  as  such 
opposition  seems  likely  to  develop,  the  advantage  above  described  is  counteracted, 
local  investors  becoming  doubtful  regarding  the  safety  of  their  money  under  such 
circumstances. 


THE  ORGANIZATION  OF  INDUSTRY  197 

skilled  labor  is  thus  formed  which  acts  as  a  powerful  inducement  to 
the  expansion  of  the  industry  from  within,  while  at  the  same  time  it 
draws  prospective  manufacturers  to  this  center  from  without. 

The  use  of  machinery  has,  however,  tended  to  lessen  the  impor- 
tance of  a  specially  skilled  labor  supply.  In  proportion  as  an  industry 
becomes  automatic,  its  localization  becomes  independent  of  its  supply 
of  special  labor.  It  is  interesting  to  note  in  this  connection  that  six  of 
the  fifteen  industries  selected  for  study  on  account  of  their  marked 
localization  are  industries  in  which  handwork  constituted  for  many 
years  the  most  important  part  of  the  operations.  In  some  instances, 
such  as  the  glove,  collar,  and  hat  manufacturing,  handwork  is  still 
an  important  factor,  while  in  the  manufacture  of  boots  and  shoes 
handwork  persisted  to  a  large  extent  as  late  as  1870. 

In  a  specialized  community  of  this  sort  the  contact  of  workmen 
and  employers  with  each  other  results  in  a  mutual  improvement  in 
manufacturing  methods.  Laborers  "talk  shop"  more  or  less  when 
not  at  work,  and  the  devices  adopted  in  one  establishment  for  making 
the  work  easier  are  soon  adopted  in  all.  Similarly,  it  is  easy  for  a 
manufacturer  in  such  a  place  to  note  the  experiments  with  patented 
improvements  carried  on  in  another  establishment,  and  to  adopt  such 
improvements  just  as  soon  as  their  value  is  demonstrated,  by  paying 
the  royalty  demanded. 

In  the  course  of  time  another  advantage  arises  in  such  a  specialized 
center — the  possibility  of  subdividing  the  processes  of  manufacture 
among  several  establishments — a  division  of  labor  among  employers. 
In  the  Massachusetts  shoe  cities,  for  example,  there  are  establish- 
ments which  make  only  uppers,  and  others  which  make  only  "findings" 
(counters,  shanks,  heel  stiffen ers,  etc.).  Soon,  also,  subsidiary  indus- 
tries spring  up  for  the  supply  of  the  special  machinery  and  tools 
required.  As  a  result,  new  and  up-to-date  tools  and  machinery  may 
be  had  in  such  centers  with  the  least  possible  delay,  and  existing 
machinery  may  be  kept  continually  in  repair. 

Thus  a  town's  specialization  increases  its  supply  of  specialized 
labor  and  specialized  machinery.  These,  in  turn,  react  to  increase 
the  specialization  of  the  town.  Success  breeds  success  in  an  almost 
geometrical  ratio.  Cause  and  effect  propel  each  other  in  a  continually 
expanding  circle,  the  self-created  local  advantages  becoming  in  time 
so  powerful  that  they  entirely  neutralize  the  greater  general  advan- 
tages of  location  which  other  localities  may  have  come  to  possess. 


igS  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

56.   THE  DIVISION  OF  LABOR  IN  PIN-MAKINC 

To  take  an  example,  therefore,  from  a  very  trifling  manufacture, 
but  one  in  which  the  division  of  labor  has  been  very  often  taken 
notice  of,  the  trade  of  the  pin-maker;  a  workman  not  educated  to 
this  business  (which  the  division  of  labor  has  rendered  a  distinct 
trade),  nor  acquainted  with  the  use  of  the  machinery  employed  in  it 
(to  the  invention  of  which  the  same  division  of  labor  has  probably 
given  occasion),  could  scarce,  perhaps,  with  his  utmost  industry, 
make  one  pin  in  a  day,  and  certainly  could  not  make  twenty.  But 
in  the  way  in  which  this  business  is  now  carried  on,  not  only  the 
whole  work  is  a  peculiar  trade,  but  it  is  divided  into  a  number  of 
branches  of  which  the  greater  part  are  likewise  peculiar  trades.  One 
man  draws  out  the  wire,  another  straights  it,  a  third  cuts  it,  a  fourth 
points  it,  a  fifth  grinds  it  at  the  top  for  receiving  the  head;  to  make 
the  head  requires  two  or  three  distinct  operations;  to  put  it  on  is 
a  peculiar  business,  to  whiten  the  pins  is  another;  it  is  even  a  trade 
by  itself  to  put  them  into  the  paper;  and  the  important  business  of 
making  a  pin  is,  in  this  manner,  divided  into  about  eighteen  distinct 
operations,  which,  in  some  manufactories,  are  all  performed  by  dis- 
tinct hands,  though  in  others  the  same  man  will  sometimes  perform 
two  or  three  of  them.  I  have  seen  a  small  manufactory  of  this  kind 
where  ten  men  only  were  employed,  and  where  some  of  them  conse- 
quently performed  two  or  three  distinct  operations.  But  though 
they  were  very  poor,  and  therefore  but  indifferently  accommodated 
with  the  necessary  machinery,  they  could,  when  they  exerted  them- 
selves, make  among  them  about  twelve  pounds  of  pins  in  a  day. 
There  are  in  a  pound  upward  of  four  thousand  pins  of  a  middling 
size.  Those  ten  persons,  therefore,  could  make  among  them  upward 
of  forty-eight  thousand  pins  in  a  day.  Each  person,  therefore, 
making  a  tenth  part  of  forty-eight  thousand  pins,  might  be  considered 
as  making  four  thousand  eight  hundred  pins  in  a  day.  But  if  they 
had  all  wrought  separately  and  independently,  and  without  any  of 
them  having  been  educated  to  this  peculiar  business,  they  certainly 
could  not  each  of  them  have  made  twenty,  perhaps  not  one  pin  in  a 
day;  that  is,  certainly,  not  the  two  hundred  and  fortieth,  perhaps 
not  the  four  thousand  eight  hundredth  part  of  what  they  are  at 
present  capable  of  performing,  in  consequence  of  a  proper  division 
and  combination  of  their  different  operations. 

'  From  Adam  Smith,  The  Wealth  of  Nations,  Book  I,  chap.  i. 

[For  a  description  of  modern  machine  methods  in  pin-making  sec  Selection 
4,2. — Editoks.] 


THE  ORGANIZATION  OF  INDUSTRY  jqq 

57.  DIVISION  OF  LABOR  IN  MEAT  PACKING' 

Notwithstanding  the  high  skill  required,  the  proportion  of  skilled 
workmen  in  the  butchers'  gang  is  very  small,  owing  to  a  minute 
division  of  labor.  It  would  be  difficult  to  find  another  industry  where 
division  of  labor  has  been  so  ingeniously  and  microscopically  worked 
out.  The  animal  has  been  surveyed  and  laid  ofif  like  a  map ;  and  the 
men  have  been  classified  in  over  thirty  specialties  and  twenty  rates  of 
pay,  from  i6  cents  to  50  cents  an  hour.  The  50-cent  man  is  restricted 
to  using  the  knife  on  the  most  delicate  parts  of  the  hide  (floorman) 
or  to  using  the  axe  in  splitting  the  backbone  (splitter) ;  and,  wherever 
a  less  skilled  man  can  be  slipped  in  at  18  cents,  i8|  cents,  20  cents,  21 
cents,  22^  cents,  24  cents,  25  cents,  and  so  on,  a  place  is  made  for  him, 
and  an  occupation  mapped  out.  In  working  on  the  hide  alone  there 
are  nine  positions,  at  eight  different  rates  of  pay.  A  20-cent  man 
pulls  oS  the  tail,  a  22^-cent  man  pounds  ofiE  another  part  where  the 
hide  separates  readily,  and  the  knife  of  the  40-cent  man  cuts  a  different 
texture  and  has  a  different  "feel"  from  that  of  the  50-cent  man. 
SkiU  has  become  specialized  to  fit  the  anatomy. 

In  this  way,  in  a  gang  of  230  men,  killing  105  cattle  an  hour,  there 
are  but  1 1  men  paid  50  cents  an  hour,  3  men  paid  45  cents,  while  the 
number  getting  20  cents  and  over  is  86,  and  the  number  getting  under 
20  cents  is  144,  as  follows: 

Typical  Crew  of  Cattle  Butchers  and  Helpers 

Rate  of  pay  per  hour  No.  of  men  at  rate 

50    cents II 

45  "     3 

40  "     5 

S2h  "    6 

31^  "    2 

30  "     2 

27h     "     4 

26§     "     6 

2S       "     6 

24  I 


22^       "      16 


<< 


21  4 

20  "      20 

m  "  5 

15  to  18  cents 139 

Average  21  Total 230 

'From  John  R.  Commons,  "Labor   Conditions  in  Meat  Packing  and  the 
Recent  Strike,"  in  The  Quarterly  Journal  of  Economics,  XIX,  3-4. 


200  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

58.     DIVISION  OF  LABOR  IN  THE  SHOE-MAKING  INDUSTRY* 

In  the  cutting-room  the  parts  which  form  the  upper  are  cut  out. 
For  the  best  goods  this  is  done  with  a  hand  knife.  For  the  less  expen- 
sive classes  of  leather,  and  for  linings  and  gussets — which  are  usually 
cut  from  cloth — a  die  is  used.  The  die -cutters  are  also  called  block- 
hands,  (linkers,  and  clickers.  A  skiver  works  in  the  fitting-  or  stitching- 
room,  and  skives  or  cuts  to  a  bevel  in  a  skiving  machine  the  edges  of 
the  pieces  for  the  uppers.  Cementers  or  pasters  put  cement  on  the 
skived  surfaces  which  folders  fold  over  and  stick  together  by  pressure 
either  in  a  machine  or  by  hand,  thus  producing  a  finished  instead  of 
a  raw  edge.  Upper-stitchers  include  all  workers  on  sewing-machines 
in  the  fitting-room,  whether  on  leather  or  linings.  An  eyelet-row 
stitcher  puts  stitching  on  the  quarter,  just  outside  the  place  where 
the  row  of  hooks  and  eyelets  will  be.  A  closer  stitches  or  closes  the 
quarters  together  at  the  back,  and  a  seam-rubber  or  seam-pounder 
smooths  this  seam  by  rubbing  or  pressing  it  out  as  flat  as  possible  on 
a  machine.  A  gore-  or  gusset-stitcher  stitches  in  gores  or  gussets  such 
as  appear  in  congress  boots.  A  lining-stitcher,  lining-maker,  or  liner 
sews  together  the  different  pieces  of  the  lining,  and  a  closer-on  or 
in-seamer  stitches  the  lining  into  the  quarters.  When  the  vamps 
are  lined  separately  a  vamp-liner  does  the  work.  On  fine  work  a 
lacing-stitcher  binds  the  lining  with  a  facing  of  leather.  A  beader 
operates  a  machine  of  the  same  name  which  presses  together  the 
seam  made  around  the  top  of  the  quarters  by  closing  on.  A  top- 
stitcher  or  carder  runs  stitching  around  the  quarters  just  below  this 
seam,  through  the  quarter  and  lining.  A  buttonhole-machine  operator 
puts  the  quarters  for  button  shoes  through  her  machine,  which  makes 
a  cut,  lays  a  heavy  cord  around  the  edge,  and  stitches  over  the  cord 
and  through  the  edge,  making  a  buttonhole.  The  buttonhole-finisher's 
machine  sews  down  that  part  of  the  heavy  cord  which  passes  from 
buttonhole  to  buttonhole.  The  buttons  are  sewed  on  by  hand  or  by 
machine,  or  are  fastened  on  with  wire  staples.  A  gang-punch  operator 
punches  the  holes  for  eyelets  in  laced  shoes.  An  eyeleter  or  fastener- 
setter  sets  in  the  eyelets  with  an  eyeleting  machine.  A  hooker  puts  in 
the  hooks  with  a  hooking  machine.  A  marker  or  tip-marker  marks  on 
the  vamp  the  place  where  the  tip  is  to  go,  and  a  tipper  or  tip-stitcher 
stitches  it  on;   sometimes  a  tip-paster  pastes  or  gums  the  tips  onto 

'  Adapted  from  the  U.S.  Census  Special  Report  on  Employees  and  Wages 
(1903),  pp. 1199-1201. 


THE  ORGANIZATION  OF  INDUSTRY  201 

the  vamps  before  they  are  stitched.  A  perforator  perforates  the  edges, 
and  a  tip-fixer  glues  down  or  otherwise  adjusts  them.  A  vamp-closer 
stitches  the  two  ends  of  the  vamp  together  behind.  A  vamper  sews 
together  the  quarters  and  vamps.  A  barrer  or  stayer  stitches  back 
and  forth  through  the  edges  of  the  two  quarters.  A  heel-stay  stitcher 
and  an  eyelet-stay  stitcher  put  on  heel  stays  and  eyelet  stays,  respec- 
tively, after  the  lining  has  been  closed  on.  A  fancy  stitcher  is  employed 
on  some  work  to  do  stitching,  which  serves  merely  as  decoration. 
A  foxing  stitcher  sews  to  the  back  of  the  vamp  of  some  shoes  a  piece 
of  leather  called  a  foxing.  On  fine  work,  a  tongue-binder  binds  the 
edges  of  the  tongues  with  cloth  or  leather;  the  tongues  are  stitched 
into  place  by  tongue-stitchers.  A  strap-maker  makes  leather  straps 
for  ladies'  slippers,  or  straps  by  which  shoes  are  pulled  onto  the  foot. 
Table  workers  are  unskilled  operatives  who  do  such  work  as  gumming 
or  pasting,  tip  marking,  and  sewing  on  buttons,  by  hand,  at  tables 
in  the  stitching-room. 

In  the  sole-leather  room,  the  parts  which  are  to  form  the  bottom 
of  the  shoe  are  made.  These  parts  are:  outsoles,  half  soles,  and 
inner  soles;  heels,  composed  of  heel  lifts  and  top  lifts;  and  shanks. 
Each  of  these  parts  is  cut  by  a  cutter  designated  by  the  particular 
part  he  cuts,  the  work  being  done  with  dieing-out  machines  like 
those  used  in  the  cutting-room.  The  outsole-cutter  takes  a  side  of 
sole  leather  and  cuts  the  best  parts  of  it  into  outsoles;  what  cannot 
be  used  for  these  goes  to  the  half-sole  cutter,  then  in  turn  to  the  inner- 
sole,  top-lift,  and  heel-lift  cutters.  Sole-cutters  and  top-lift  cutters 
have  to  use  good  judgment  in  deciding  what  parts  of  a  side  of  leather 
are  fit  for  the  different  soles  and  for  the  top  lifts.  A  stock-sorter 
selects  the  stock  for  the  various  orders,  an  occupation  requiring  skill 
acquired  only  by  long  experience.  A  rander  makes  the  rand — a 
horseshoe-shaped  piece  of  leather  used  to  make  the  heel  fit  the  curve 
of  the  shoe  bottom.  A  splitter  runs  the  soles  through  a  splitting 
machine,  which  reduces  them  to  a  uniform  thickness  by  splitting  a 
thin  slice  from  the  flesh  side.  A  rounder  rounds  them  in  a  rounding 
machine.  A  channeler  cuts  a  groove  or  channel  in  the  outsoles  and 
inner  soles  a  short  distance  inside  the  edge.  A  stock-wetter  or  damper, 
by  immersing  the  leather  in  water  for  a  short  time,  brings  it  to  the 
temper  required  for  the  successful  cutting  of  the  channel.  The 
stitching  of  the  soles  is  done  through  the  floor  of  this  channel,  the  leaf 
of  leather  made  in  cutting  the  channel  having  been  turned  back  out 


202  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  the  way  of  the  needle  by  a  channel-turner.  A  sole-skiver,  working 
with  a  ski\'ing  or  scarfing  machine,  skives  the  back  edges  of  the  half 
soles,  which  are  to  lie  between  the  outsoles  and  the  inner  soles,  so  that 
they  shall  fit  the  angle  where  these  come  together.  A  feather-edger 
skives  the  shanks  of  the  outer  sole.  Stock-filter  is  a  general  term  for 
an  operative  who  does  any  of  several  operations  in  fitting  the  soles 
and  heels.  A  half-sole  fitter  cements  the  half  sole  to  the  outsole. 
A  sole-tnolder  places  the  soles  one  at  a  time  on  the  metal  form  of  a 
molding  machine,  molding  them  into  the  shape  required  for  the 
finished  shoe.  A  roller  passes  the  soles  between  heavy  steel  rollers, 
which  compress  and  level  them.  A  heel-maker  or  tacker  assembles 
the  several  heel  lifts,  with  the  exception  of  the  top  lift,  presses  them 
together  in  a  heel-building  machine,  and  drives  a  few  tacks  through 
them.  A  heel-compressor  molds  them  into  shape  in  a  powerful 
machine.  In  the  poorer  grades  of  shoes  the  heel  is  made  of  scrap 
leather  and  leather  board  or  pulp.  The  composite  material,  called 
pancake,  is  made  by  an  operative,  usually  a  girl,  called  a  pancake- 
maker.  A  counter-cutter  cuts  out  on  a  machine  the  counters  which 
keep  the  back  of  the  vamp  in  place;  a  counter-skiver  skives  their 
edges,  and  a  counter-molder  with  a  powerful  machine  shapes  them 
between  steel  forms.  A  shank-cutter  cuts  with  a  die  that  part  of  the 
shank  which  is  composed  of  leather  or  leather  board. 

The  uppers  and  the  several  parts  which  form  the  bottoms  are 
brought  together  in  the  making-  or  bottoming-room.  A  bottomer 
is  any  operative  occupied  with  any  of  the  operations  in  the  bottom- 
ing of  a  shoe.  A  puller-over  fastens  an  inner  sole  with  one  or  two 
tacks  to  the  bottom  of  a  last.  Then,  taking  an  upper,  he  inserts 
the  counter  and  box  toe  in  their  places  under  the  lining  and  draws 
the  upper  over  the  last.  A  laster  is  a  skilled  man  who,  with  the  aid 
of  a  lasting  machine,  pulls  the  upper  down  over  the  inner  sole  evenly 
and  firmly,  and  tacks  it  all  the  way  around  the  sole.  A  shanker 
tacks  the  shank  in  place,  cuts  away  the  superfluous  upper  leather 
gathered  under  the  toe,  beats  the  edge  of  the  upper  out  as  flat  as  pos- 
sible wherever  it  is  gathered,  and  draws  out  the  tacks  which  hold 
the  inner  sole  to  the  last.  If  a  shoe  is  to  be  made  by  the  Goodyear 
or  welt  system,  a  Goodyear  welter  or  welt-sewer  sews  on  a  welt  around 
the  bottom  of  the  shoe.  A  welt-butter  butts  or  joins  welts  on  Good- 
year and  hand-sewed  shoes.  A  joiner  joins  the  ends  of  the  welt 
when  it  is  run  around  the  heel.  A  sole-filler  fills  the  space  inclosed 
by  the  welt,  which  would  form  an  air  space  if  the  outsole  were  put 


THE  ORGANIZATION  OF  INDUSTRY  203 

on  immediately,  with  a  piece  of  tarred  felt,  or  with  a  paste  of  ground 
cork  and  cement.  A  sole-layer  or  stacker  lays  the  outsole  in  cement 
on  the  bottom  of  the  shoe  and  firmly  presses  it  in  a  machine.  A 
Goodyear  stitcher  sews  the  outsole  to  the  welt.  A  rough  rounder 
operates  a  machine  of  the  same  name,  which  cuts  down  the  outsole 
to  the  shape  of  the  last.  After  the  stitching  a  channel- cementer 
brushes  cement  into  the  channel.  A  leveler  or  beater-out  then  presses 
down  the  leaf  of  the  channel  by  rubbing  over  it  a  piece  of  steel  and, 
by  pressing  out  or  leveling  the  bottom  in  a  machine,  gives  the  sole 
the  shape  it  is  to  take  in  the  finished  shoe. 

The  shoe  now  has  all  its  parts.  The  rest  of  the  work  in  the 
making-room  consists  in  trimming  the  edges  of  the  soles  and  heels 
and  preparing  them  for  the  finishing.  For  the  sake  of  clearness, 
the  operations  on  the  soles  will  be  considered  consecutively,  then 
those  on  the  heels.  An  edger  or  edge-trimmer  trims  smooth  the 
forepart  edges  or  edges  of  the  sole  on  a  revolving  cutter.  A  prick- 
stitcher  brings  into  prominence  the  stitches  on  the  surface  of  the 
projecting  sole,  using  a  small  machine  with  which  little  grooves  are 
impressed  between  the  stitches.  A  heel-slugger  drives  into  the  heel 
a  row  of  steel  or  brass  nails.  A  heel-trimmer  or  shaver  trims  or  shaves 
the  curved  edge  of  the  heel.  A  heel-scourer  sandpapers  the  heel, 
the  sandpaper  being  attached  to  the  circumference  of  a  wheel.  A 
heel-breaster  cuts  smooth  the  front  of  the  heel  with  a  knife  driven 
by  a  foot  lever.  In  the  bottom-finishing  room  a  bottom-sander,  buffer, 
scourer,  or  cuffer  sands,  buffs,  or  scours  the  bottoms  of  the  soles  and 
heels  with  a  revolving  roll  covered  with  sandpaper.  Naumkeag- 
machine  operators,  with  a  Naumkeag  machine,  treat  the  shanks  in 
the  same  way.  Blackers  include  all  who  blacken,  paint,  or  stain  the 
top,  edges,  or  bottom  of  shoes  in  the  final  processes.  An  edge-blacker, 
a  boy,  applies  blacking  or  ink  to  the  edges  with  a  brush.  An  edge- 
setter  sets  the  edges  with  a  block  of  steel  cut  to  fit  the  edge  and  heated 
by  gas  or  by  friction.  A  heel-blacker  blacks  the  edge  of  the  heel. 
A  bottom-  or  shank-blacker  or  painter  blackens  or  paints  the  soles,  the 
bottoms  of  the  heels,  and  the  shanks.  A  burnisher,  shank-burnisher, 
or  shank-fakir  burnishes  the  better  class  of  blacked  bottoms  by  rubbing 
them  with  a  heated  hand  iron.  A  bottom- finis  her  polishes  both  painted 
and  blacked  surfaces  with  revolving,  cloth-covered  roUs  and  revolving 
brushes.  On  some  shoes,  bottom- gummers  place  a  thin  coat  of  gum 
solution  before  the  last  polishing,  thus  giving  a  smooth  hard  finish. 
Stamping-machine  operators,  impress  a  name,  trade-mark,  or  design 


204  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  some  kind  on  the  soles  of  many  shoes.  A  wheeler  runs  a  small 
cogged  wheel  around  the  upper  edge  of  the  heels  of  most  shoes  and 
the  soles  of  many,  thus  leaving  the  imprint  of  its  cogs. 

In  the  upper-finishing  and  packing-room  a  treer  puts  the  shoe 
on  a  horizontal  form  and  applies  a  paste  dressing  to  the  upper, 
rubbing  it  in  thoroughly  with  a  stick.  A  dresser,  brusher,  or  polisher 
dresses  and  polishes  the  shoes  with  revolving  power  brushes.  A 
cleaner  cleans  the  kid  uppers  of  men's  and  women's  fine  shoes  with 
water  on  the  revolving  brush,  and  then  nearly  all  are  ironed  while 
on  a  tree  by  an  ironer  who  rubs  a  hot  iron  over  them,  in  order  to  make 
them  stand  up  and  give  them  form.  All  these  operatives  are  col- 
lectively CdXltd  finishers.  A  sock-liner  puts  in  the  sock  and  heel  linings, 
which  are  pieces  of  thin  leather  or  cloth  gummed  to  the  inside  of  the 
shoe  bottom.  A  stringer  or  lacer  laces  the  shoes,  or  a  buUoner  buttons 
them.  Inspectors  look  over  the  finished  shoes,  and  wrappers  wrap 
them  in  paper  and  place  them  in  paper  boxes  or  cartons.  Labelers 
paste  on  the  carton  labels,  packers  put  the  goods  in  cases,  and  they 
are  shipped  by  shippers.  A  bench-hand  is  a  hand  sewer  at  a  bench, 
or  one  who  does  any  hand  mending  or  repairing  that  is  necessary. 
In  this  category  are  cobblers,  toe-repairers,  hand  heel-shavers,  etc. 


B.    MANAGEMENT 

59.    THE  PROBLEM  OF  THE  BUSINESS  MAN 

The  statement  that  the  great  majority  of  business  enterprises 
result  in  failure  is  sufficiently  startling,  but  it  is  not  a  statement 
which  is  likely  to  be  questioned  by  anyone  who  really  appreciates 
the  complexity  of  the  problem  of  the  business  man.  One  way  of 
stating  that  problem  is  to  say  that  all  business  consists  of  two  ele- 
ments: production  of  goods  and  marketing  of  goods.  This  descrip- 
tive classification  in  itself  conveys  a  considerable  idea  of  complexity 
to  anyone  who  has  seen  any  of  the  modern  literature  on  Scientific 
Management,  or  who  has  seen  a  portion  of  the  material  on  scientific 
methods  of  distribution.  There  is,  however,  an  analytical  method 
of  stating  the  business  man's  task  which  serves  to  bring  out  more 
clearly  its  complexities.  The  problem  may  be  regarded  as  primarily 
the  mechanical  problem  of  combining  labor,  capital,  natural  resources, 
and  directive  skill  in  advantageous  proportions.  But  this  primary 
problem  is  indefinitely  complicated  by  the  fact  that  the  advantageous 
proportions  of  labor,  capital,  etc.,  are  constantly  changing  and  inde- 


THE  ORGANIZATION  OF  INDUSTRY  205 

terminate  as  a  result  of  the  operation  of  the  laws  of  price  and  in 
consequence  of  progressive  methods. 

The  mechanical  problem  alone  is  exceedingly  complex,  as  is  suffi- 
ciently implied  by  a  mere  statement  of  the  law  of  diminishing  returns 
in  its  universal  application.  If  a  business  man  were  told,  "  Take  any 
grade  or  grades  of  land  in  any  quantity  you  choose,  take  any  grade  or 
grades  of  labor  in  any  quantity  you  choose,  take  any  of  the  present 
forms  of  capital  in  any  quantity  you  choose,  and  set  up  an  organization 
which  will  be  of  maximum  efficiency,"  his  problem  would  be  formid- 
able although  in  attacking  it  he  could  secure  expert  guidance  from  the 
mechanical  engineer,  for  after  all,  this  arrangement  of  the  productive 
factors  is  primarily  a  matter  of  mechanics.  Yet  however  intricate 
the  original  mechanical  problem  may  be,  it  suggests  but  the  beginning 
of  the  complications  in  which  the  business  man  finds  himself.  He  is 
not  able  to  take  any  grade  of  land  in  any  quantity  he  chooses;  he  may 
not  select  any  grade  of  labor  in  any  quantity  he  chooses;  he  may  not 
utilize  any  existing  form  of  capital  in  any  quantity  he  chooses,  but 
in  every  case,  the  element  of  price  enters,  and  he  is  forced  to  ask  him- 
self such  questions  as  these:  "Will  this  grade  of  land  for  which  I  must 
pay  X  dollars  be  better  for  me  than  that  grade  of  land  for  which  I 
must  pay  y  dollars?  Shall  I  use  this  grade  of  labor  at  this  given 
price,  or  would  it  be  better  for  me  to  use  another  grade  of  labor  at  a 
different  price  ?  Shall  I  use  this  particular  machine  at  this  price,  or 
shall  I  use  one  of  the  other  scores  of  machines  which  will  be  furnished 
me  at  different  prices?"  And  after  he  has  reached  some  solution  to 
these  questions,  he  learns  that  price  is  again  the  significant  consid- 
eration when  he  comes  to  disposing  of  his  product.  In  all  of  these 
price  intricacies,  the  business  man  is  pretty  much  the  victim  of  circum- 
stances. Unless  he  has  monopoly  power,  he  has  as  an  individual  very 
little  to  say  concerning  the  price  at  which  he  may  secure  any  factor 
of  production ;  and  still  less  to  say  concerning  the  price  at  which  he 
may  dispose  of  his  product. 

Still  further  complicating  the  business  man's  intricate  mechanical 
problem,  shot  through  and  through  as  it  is  with  the  variable  factor 
of  price,  we  must  recognize  another  variable:  the  influence  of  progress 
in  industrial  or  commercial  methods.  Changes  in  methods  may 
influence  and  very  likely  will  influence  practically  all  of  the  other 
variables  in  the  problem.  They  may  be  changes  which  the  business 
man  has  brought  about  from  an  intensive  study  of  his  own  business. 
They  may  be  changes  which  are  forced  upon  him  by  inventions  of 
new  equipment.     They  may  be  changes  forced  upon  him  by  some 


y 


206  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

revolution  in  the  methods  of  production  or  of  marketing  his  goods. 
The  chances  are  that  here  also  he  will  be  the  victim  of  circumstances. 
He  will  as  an  individual  have  little  influence  in  determining  the  course 
of  events,  but  the  slightest  misjudgment  of  the  actual  course  of  events 
means  for  his  business  only  one  possible  outcome:  failure. 

60.    PROBLEMS  OF  FARM  MANAGEMENT' 

|8 

_  >> 

o.ti 

11  ^  .8 

b 


3 


S 


5  5"""  o      > 

^t!         o  ttiiti  ,.  ct      a  kit  ''— "S 

S.        3  a  I  g  >     ^  S  .ti  a  SS  ° 

■     -"^----<  .£-3  ^Stiy 


S0.00    888  8^googg-3.Srt  Sg-  8  i  ..-s  2  S  o^^=2  OB  s  o  ^ 


From  T.  N.  Carver,  Principles  of  Rural  Economics,  p.  223.     Ginx)  &  Co. 
1911. 


THE  ORGANIZATION  OF  INDUSTRY  207 

61.   THE  PRINCIPLES  OF  BUSINESS  ORGANIZATION^ 

In  defining  business  organization,  we  must  not  take  for  our  unit 
of  measurement  a  complete  modern  corporate  institution.  We  must 
go  back  of  this  to  the  two  fundamental  elements  governing  all  business 
transactions  between  members  of  the  human  race.  These  two 
elements  we  can  class  simply  as  "producing"  and  "selling."  Any 
individual  or  any  body  of  individuals  doing  either  one  or  both  of  these 
things  becomes  a  business  organization.  Joining  together  these 
two  primal  elements  there  is  a  third  element  which  becomes  a  most 
important  factor  in  any  business.  This  can  be  described  under  the 
title  of  "accounting"  or  "reckoning."  When  a  farmer  raises  a  bushel 
of  turnips,  takes  them  to  market,  sells  them  and  records  the  trans- 
action in  the  back  of  the  family  almanac,  he  has  performed  all  the 
functions  of  a  business  organization. 

HOW   CONTROL   IS   VESTED  AND   EXERCISED   IN   BUSINESS 

Turning  now  from  the  analysis  of  the  functions  of  a  business  to 
an  examination  of  its  sources  of  authority,  we  find  a  variety  of  methods 
in  which  control  may  be  exercised.  In  every  organization  there  is  an 
ownership  element  which  constitutes  its  primal  authority  and  control. 
Fundamentally,  the  form  of  this  ownership  is  of  no  material  impor- 
tance, whether  it  is  vested  in  an  individual,  in  a  partnership  or  in  a  cor- 
poration of  stockholders.  The  essential  fact  is  that  this  ownership 
constitutes  the  foimtain  head  of  all  business  organization,  and  sub- 
ordinate to  this  authority,  however  it  may  be  vested,  are  ranged  the ' 
three  departments  of  production,  accounting  and  selling,  by  which  the 
purposes  of  the  owning  power  are  put  into  effect.  The  form  of  any 
business  organization  so  far  as  developed  up  to  this  point  can  be 
illustrated  in  a  simple  diagram  such  as  shown  in  Form  i,  on  p.  208. 

Such  an  organization  is  characteristic  and  complete.  It  applies 
to  any  business  enterprise,  whether  the  yearly  volume  of  business  is 
numbered  in  three  or  eight  figures.  The  corner  groceryman  who 
constitutes  his  own  business  organization  performs  all  the  functions 
of  the  great  department  store.  He  becomes  the  "production" 
division  when  he  buys  his  goods  from  the  wholesaler  and  prepares 
them  for  the  shelves.  He  becomes  the  "sales"  division  when  he 
writes  a  price  card  to  put  in  the  window  and  sells  some  of  the  goods  to 
a  customer  over  the  counter,  and  he  becomes  the  "accounting" 
division  when  he  goes  to  his  desk  and  makes  an  entry  of  the  sales  in 

'  Adapted  from  Business  Administration,  pp.  13-29.     The  System  Co.,  igog. 


2o8 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


his  order  or  cash  book.     At  the  same  time  he  is  exercising  these  offices 
by  power  of  the  appointment  received  at  his  own  hands  as  owner. 

When  owTiership  is  vested  in  one  individual,  the  matter  of  control 
and  authority  is  of  the  simplest  form.  The  owner  may  have  a 
factory  manager,  an  office  manager  and  a  sales  manager,  but  all 
three  divisions  are  under  his  absolute  control  and  dictation.  It  is 
possible  that  the  individual  owner  may  arrange  his  organization  so 
that  he  need  not  give  it  his  actual  personal  supervision  and  yet  retain 


/^CONTROL  \. 

y^                THROUGH                  >^ 

y^               OWNERSHIP   BY                   >v 

y^                      1.    INDIVIDUAL                                       >>,„^^ 

y^                        (  2.    PARTNERSHIP,  0r\                         ^S^ 

y^                                     3.    CORPOF 

lATION                                                   N. 

1 

1 

1 

1 
III 

PRODUCTION 

ACCOUNTING  OR 

selling:' 

OR  SOURCE  OF 

SUPPLY  by: 

OFFICE   DIVISIONS 

DIRECT  AND 

1.    ORIGINAL 

INCLUDING  ALL 

INDIRECT  MEANS 
OF  BRINGING 

PRODUCTION 

RECORDS  AND 

PRODUCT  TO   PUBLIC 

2.    MANUrACTURE,  OR 

SYSTEMS   EMPLOYED 

NOTICE  AND  PLACING 

3.    PURCHASE  FROM 

IN  CONDUCTING 

IT  IN  THE   HANDS 

OTHER   PRODUCERS 

THE   BUSINESS 

OF  THE  CONSUWER 

Form  i. — ^The  factors  fundamental  in  any  business  are  here  represented. 
Producing,  acc»unting,  and  selling  are  the  three  indispensable  mercantile 
activities,  over  which  contiol  is  exercised  by  some  form  of  ownership. 

a  cohesive  and  co-operative  administration.  This  can  be  done  by 
forming  an  executive  committee  made  up  of  his  division  managers, 
who,  while  retaining  their  respective  positions  in  the  organization, 
will  be  bound  by  united  action  of  the  committee  on  all  important 
matters  of  business  poHcy,  the  owner  delegating  his  control  to  such  a 
committee  under  general  instructions. 

HOW   A   PARTNERSHIP    IS   FORMED 

In  a  partnership,  two  or  more  individuals  are  bound  into  one 
controlling  factor  by  a  certain  partnership  agreement.    This  agree- 


TRE  ORGANIZATION  OF  INDUSTRY 


209 


ment  is  in  legal  form  and  should  be  of  the  most  exact,  detailed  and 
binding  character  to  avoid  any  misunderstandings,  or  complications. 
This  legal  partnership  becomes  in  reality  the  controlling  ownership 
in  itself  and  the  members  of  the  firm  are  circumscribed  by  its  pro- 
visions. The  partnership  agreement  defines  the  shares  that  each 
member  of  the  firm  shall  have  in  the  conduct  of  the  business,  his 
duties,  the  voice  that  he  shall  have  in  deciding  any  matters  of  policy. 
It  determines  the  division  of  profits,  the  proportionate  assessment 
for  losses,  and  the  manner  and  methods  by  which  the  business  shall 


A.  C.JONES 


E.  B.  SMITH 


D.  F.  BROWN 


FORM  BY  PARTNERSHIP 

AGREEMENT,  FIRM  OF 
JONES,  SMITH  &,  BROWN 


JONES,  MGR. 

PRODUCTION 

DIVISION 


SMITH,  MGR. 

OFFICE 

DIVISION 


BROWN,  MGR. 
SELLING 
DIVISION 


Form  2. — ^This  chart  and  the  two  which  follow  represent  three  common 
methods  of  business  control  exercised  through  a  partnership.  In  this  case,  three 
partners  put  their  capital  together  and  manage  their  own  business,  each  member 
of  the  firm  taking  charge  of  one  department. 

be  conducted.  The  agreement  may  also  provide  for  a  receivership 
or  sale  of  the  respective  interests  in  case  of  vital  disagreement  among 
the  partners.  In  the  matter  of  determining  the  control  of  the  busi- 
ness, the  partnership  agreement  may  provide  for  a  division  of  duties 
and  of  authority  among  the  various  partners  (Form  2),  or  delegate 
the  entire  management  to  one  of  the  partners  (Form  3),  or  all  the 
members  of  the  firm  may  form  an  executive  committee  under 
whose  general  control  and  authority  the  division  managers  carry  on 
the  business  (Form  4).  It  is  frequently  the  case  that  some  member 
of  the  firm  is  a  "silent  partner,"  known  to  the  world  only  under  the 
title  "and  Company." 


210 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


JONES,   SMITH    &.    BROWN 

BOUND   BY  PARTNERSHIP  AGREEMENT 

DELEGATE    MANAGEMENT    TO 

BROWN 
GENERAL    MANAGER 

■ 

PRODUCTION    MGR 

OFFICE    MGR. 

SALES    MGR. 

Form  3. — In  this  partnership  arrangement,  two  members  of  the  firm  are  not 
actively  engaged  in  the  business.  By  a  general  agreement,  the  third  member  is 
placed  in  entire  charge,  wi.th  authority  to  appoint  his  assistants,  at  the  head  of 
the  three  branches  of  the  work. 


JONES,   SMITH    4    CO. 

BY    PARTNERSHIP    AGREEMENT 

COMPOSE    THE 

EXECUTIVE    COMMITTEE 
WHICH    APPOINTS 

PRODUCTION    MGR 

OFFICE    MGR. 

SALES    MGR. 

Form  4. — In  this  partnership  scheme,  one  or  more  silent  partners  are  repre- 
sented by  the  word  "Company."  The  members  of  the  firm  here  exercise  general 
appointing  power  and  oversight,  while  delegating  everyday  control  to  their  chosen 
managers. 


THE  ORGANIZATION  OF  INDUSTRY  211 

In  Form  4  it  will  be  noted  that  the  managers  of  the  producing, 
accounting  and  selling  di\dsions  are  given  the  actual  working  or  opera- 
tive authority  over  the  business,  under  guidance  of  a  committee  made 
up  of  the  partners  of  the  firm. 

Owing  to  the  various  advantages  of  a  corporation,  such  a  form  of 
ownership  is  best  adapted  to  modern  business  conditions.  Such 
ownership  also  permits  a  more  systematic  and  cohesive  organization 
and  more  successful  co-operation  of  the  working  parts  because  of  the 
definiteness  of  its  control  and  its  accurate  and  fairly  defined  limits  of 
authority. 

In  a  corporate  organization,  ownership  is  vested  in  the  stock- 
holders of  record,  and  these  stockholders  are  bound  by  the  stock 
subscription  list,  the  articles  of  incorporation  and  the  constitution  and 
by-laws.  These  documents  provide  for  the  election  of  a  board  of 
directors,  an  executive  committee  and  various  officers,  to  whom  the 
administration  of  business  is  thus  delegated  by  vote  of  the  stock- 
holders.   Form  5  shows  the  analysis  of  a  corporate  organization. 

FORMATION  OF  AN  INCORPORATED  STOCK  COMPANY 

The  process  of 'forming  an  incorporated  stock  company  is  some- 
what complex  and  varies  in  different  states.  The  general  plan,  how- 
ever, is  based  on  a  stock  subscription  list  to  which  those  who  wish  to 
become  stockholders  attach  their  signatures,  specifying  the  number 
of  shares  for  which  they  subscribe.  Heading  this  subscription  list 
is  the  form  agreement  stating  the  purposes  of  the  organization,  its 
name,  the  amoimt  of  capital  stock,  and  the  par  value  of  each  share. 
After  the  required  amount  of  capital  has  been  subscribed,  a  stock- 
holders' meeting  is  held,  at  which  a  constitution  and  by-laws  are 
adopted  and  directors  are  elected  who  subsequently  choose  the  officers. 
The  amoimts  subscribed  having  been  paid  in,  in  whole  or  in  part,  the 
state  charter  of  incorporation  may  then  be  obtained  and  the  company 
may  commence  business. 

The  board  of  directors  may  arrange  the  further  details  of  organiza- 
tion as  it  sees  fit,  but  it  frequently  transfers  its  authority  largely  to 
the  president,  who  may  become  the  general  manager.  Or  any 
director  or  an  outside  individual  may  be  appointed  by  the  directors 
as  general  manager  and  given  full  authority,  subject  to  the  board. 
The  board  may  elect  an  executive  committee  to  which  its  authority 
is  delegated,  and  in  some  cases  another  committee  is  chosen  as  an 
advisory  committee,  at  the  head  of  which  stands  the  general  manager 


212 


MATERIALS  FOR  ELE^IENTARY  ECONOMICS 


This  advisory  committee,  in  most  large  institutions,  is  made  up  of  the 
general  manager,  who  is  closely  connected  with  the  operation  of  the  fac- 
tory and  the  organization  of  the  office;  the  treasurer,  who  is  interested 


STOCKHOLDERS 

BOUND    BY    ARTICLES   OF   INCORPORATION 
CONSTITUTION  AND   BY-LAWS 


BOARD  OF  DIRECTORS 


EXECUTIVE  COMMITTEE 


PRESIDENT 


GENERAL  MANAGER 

(APPOINTED   OR    ELECTEDI 


OFFICE    MGR. 
OR    BUSINESS    MGR. 


PRODUCTION     MGR. 
OR    FACTORY    SUPT. 


SALES    MGR 


FoKM  5. — The  usual  organization  plan  for  a  corporation  is  here  represented. 
A  nice  adjustment  of  authorities  to  duties  results  from  the  several  centers  of 
control,  each  with  a  definitely  limited  power. 

in  the  financial  work;  the  legal  advisor ;  and  in  many  instances  some 
cflScers  of  the  banking  house  through  which  the  institution  conducts  its 


THE  ORGANIZATION  OF  INDUSTRY 


213 


financial  work.    This  advisory  committee  is  able  to  meet  successfully 
the  difl5culties  of  administration  which  come  up  from  time  to  time. 

But  although  authority  is  passed  from  stockholders  to  directors, 
from  directors  to  an  executive  committee,  and  again  to  an  advisory 
committee,  there  must  be  some  positive  limitation  that  will  prevent 
any  of  these  bodies  violating  the  general  policy  of  the  institution. 
For  example,  one  of  the  largest  organizations  in  the  country  places  a 
limit  of  $10,000  upon  the  expenditures  which  can  be  made  by  the 
advisory  committee.  Any  expenditure  under  this  amount  could  not 
seriously  affect  the  policy  or  the  finances  of  the  company.    If  an 


STOCKHOLDERS 


I 


DIRECTORS 


CONTROLLER 
1 


PRESIDENT 


GENERAL  MANAGER 


PRODUCTION 
MANAGER 


OFFICE  MANAGER 


SALES  MANAGER 


o  S 


S  -1 

z  » 


Form  6. — In  this  chart  are  shown  the  same  elements  of  corporate  control  as 
in  Form  5.  Here,  however,  are  added  the  many  smaller  factors  that  are  more  or 
less  necessary  in  any  business,  arranged  according  to  their  duties  and  the  authority 
to  which  each  is  subordinated. 


expenditure  between  $10,000  and  $25,000  is  to  be  made,  it  must 
first  be  approved  by  the  executive  committee,  and  if  an  expenditure 
of  more  than  $25,000  is  deemed  necessary,  it  must  be  passed  upon  by 
the  board  of  directors.  It  is  impracticable  for  any  unimportant 
details  of  such  a  business  as  this  to  pass  beyond  the  general  manager 
or  the  advisory  committee,  but  the  financial  limit  which  has  been 
placed  upon  their  actions  makes  it  impossible  for  any  step  of  a  serious 
nature  to  be  taken  unless  it  has  the  approval  of  the  executive  commit- 
tee, or,  in  the  most  vital  matters,  of  the  directors  themselves.    Thus 


ii4 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


THE  ORGANIZATION  OF  INDUSTRY 


215 


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2i6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

details  are  decided  by  the  lower  oflScials  and  only  questions  of  general 
policy  reach  higher. 

ALL  BUSINESS  ORGANIZATIONS  BASED  ON  ONE  PRINCIPLE 

The  details  of  the  business  organization  following  ownership  con- 
trol are  practically  the  same,  whatever  form  that  ownership  takes. 
No  matter  how  complicated  an  organization  may  appear,  when 
properly  analyzed  it  can  always  be  reduced  to  the  rudimentary  form 
shown  in  the  diagram:  that  is  to  say,  ownership  concentrating  its 
power  of  control  into  a  central  authority,  known  as  the  general 
manager,  whence  such  power  is  administered  through  the  medium 
of  three  executives  over  the  main  divisions  of  the  organization,  thus 
carrying  out  the  three  functions  of  the  business:  production,  account- 
ing, and  selling. 

The  special  organization  of  these  three  divisions  varies  according 
to  the  nature  of  the  business,  its  size  and  the  perfection  of  the  system 
to  which  its  operation  has  been  reduced.  The  complete  function  of 
each  division  which  will  be  performed  through  the  different  depart- 
ments of  work  may  be  so  closely  involved  as  to  make  their  separation 
not  easily  distinguishable.  Frequently  a  general  manager  is  his  own 
production  manager,  sales  manager  and  chief  accountant  combined, 
and  when  acting  as  such  performs  all  the  duties  of  the  minor  execu- 
tives of  each  division.  It  is  also  true  that  the  heads  of  divisions  or 
departments  are  sometimes  so  named  as  to  make  their  real  position 
in  the  organization  seem  uncertain.  For  example,  an  official  may 
hold  the  title  of  "business  manager"  and  have  charge  of  both  the 
accounting  and  sales  divisions,  when,  in  fact,  his  proper  title  is  that 
of  assistant  general  manager,  as  he  simply  represents  the  executive 
in  his  detail  work. 

THE  AUDITOR   AN   OFFICIAL   OF   PECULIAR    INDEPENDENCE 

It  will  be  noticed  that  the  oflSce  of  auditor  is  (see  Form  6) 
subordinate  only  to  the  board  of  directors.  The  position  of  auditor 
may  be  filled  in  either  one  of  two  ways.  There  are  at  present  large 
auditing  companies  which  from  time  to  time  go  over  the  work  of  an 
entire  business  organization  in  order  to  prove  the  accuracy  of  the 
work  in  each  department.  The  position  of  auditor  on  this  chart, 
however,  means  tliat  there  is  a  certain  ofiicial  retained  by  the  execu- 
tive committee  as  an  active  member  of  the  organization.  The 
work  which  the  auditor  performs  in  an  organization  of  this  kind 


THE  ORGANIZATION  OF  INDUSTRY 


217 


is  usually  of  a  statistical  and  reportorial  nature,  such  as  drawing  up 
comparative  tables  of  the  work  done,  particularly  that  of  the  account- 
ing departrnent.  For  this  reason  he  is  not  put  under  the  general 
manager  nor  under  the  secretary  or  treasurer,  who  may  be  interested 
in  the  conduct  of  the  work,  but  keeps  an  independent  position  and  is 
responsible  only  to  the  executive  committee.  Only  in  this  way  can 
he  be  so  independent  that  he  can  criticize  either  favorably  or  imfavor- 
ably  the  work  that  has  been  done.  He  must  be  able  to  act  without 
fear  or  bias,  and  bring  before  the  executive  committee  the  exact 
details  of  the  business  which  they  need  most  to  know.    They  have 


raoouccR- 


FoRM  8.— A  single  department,  that  of  accounting,  is  here  analyzed.  The 
line  at  the  left  represents  material  purchased  from  the  producer.  The  bill 
for  this  purchase  goes  to  the  records;  the  material  passes  to  the  stock  room  to  be 
met  by  orders  from  customers  and  shipped  in  satisfaction  of  these  sales. 

given  up  their  authority,  but  at  the  same  time  they  must  know  that 
the  trust  they  have  imposed  is  carried  out. 

THE  FUNCTIONS  OF  THE  CONTROLLER 

Another  important  official  whose  duties  demand  that  he  be  inde- 
pendent of  the  department  heads  is  the  controller.  Sometimes  the 
work  of  this  official  and  of  the  auditor  are  performed  by  the  same 
man,  but  the  functions  should  be  discriminately  named  if  not  sepa- 
rated in  fact.  The  controller  is,  as  his  title  suggests,  the  safety 
check  on-  a  business.    He  has  absolute  control  over  disbiursements 


2i8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  all  purchase  orders  are  submitted  to  him  before  leaving  the  office. 
He  also  may  check  the  work  of  the  plant  superintendent  if  he  thinks 
that  production  is  being  carried  on  too  rapidly  for  economy.  His 
power  of  limitation  extends  also  to  the  credit  manager,  whose  deci- 
sions on  the  extending  of  credit  he  may  review  and  reverse.  He  is 
accountable  only  to  the  board  of  directors  from  whom  he  receives  his 
authority. 

In  a  stock  corporation,  as  earlier  stated,  the  officers  play  an 
inconspicuous  part  in  the  actual  operation  of  the  business,  and  yet, 
by  special  act  of  the  directors  or  by  authority  of  the  by-laws,  they 
may  become  active  elements  of  the  working  organization.  The 
president,  by  virtue  of  his  position,  is  at  the  same  time  chairman 
of  the  executive  committee.  Working  along  with  him,  with  authority 
received  from  the  same  source,  are  the  vice-president,  the  treasurer, 
and  the  secretary. 

The  vice-president  ordinarily  has  no  other  duties  than  to  take 
the  place  of  the  president  in  case  of  the  latter's  inability  to  perform 
his  usual  work.  However,  in  many  modern  organizations,  in  order 
that  the  vice-president  may  be  more  closely  associated  with  the 
organization  and  because,  in  many  instances,  he  is  financially  inter- 
ested to  a  large  extent,  he  also  acts  as  general  manager,  sales  manager, 
or  in  some  equally  responsible  position. 

The  secretary  and  treasurer  may  have  charge  of  different  depart- 
ments of  the  office  work.  Where  these  offices  are  held  by  different 
men,  the  secretary  may  have  charge  of  the  general  stenographic  and 
office  work,  and  the  treasurer  may  have  oversight  of  the  accounting 
functions  which  are  closest  connected  with  the  finances  of  the  organi- 
zation. Officers  of  the  company  are  frequently  appointed  to  execu- 
tive positions  and  retain  their  corporation  titles,  while  in  reality  those 
titles  should  be  used  only  in  their  connection  with  the  stock  corpora- 
tion itself.  For  example,  the  treasurer  of  a  corporation  might  be 
appointed  to  or  given  the  position  of  a  controller,  and  his  work  in  the 
latter  capacity  might  be  done  under  the  title  of  treasurer  but  in 
reality  he  is  simply  controller  while  he  occupies  the  controller's  desk. 
In  large  corporations,  however,  the  secretary  and  treasurer,  instead 
of  directing  any  department,  will  be  busied  with  the  more  important 
statistical  and  financial  conduct  of  the  company. 


THE  ORGANIZATION  OF  INDUSTRY  219 

62.   SCIENTIFIC  MANAGEMENT'       • 

I.    THE   FUNCTION   OF   SCIENTIFIC   MANAGEMENT 

In  the  past  the  prevailing  idea  has  been  well  expressed  in  the  saying 
that  "Captains  of  industry  are  born,  not  made";  and  the  theory 
has  been  that  if  one  could  get  the  right  man,  methods  could  be  safely 
left  to  him.  In  the  future  it  will  be  appreciated  that  our  leaders 
must  be  trained  right  as  well  as  born  right,  and  that  no  great  man 
can  (with  the  old  system  of  personal  management)  hope  to  compete 
with  a  number  of  ordinary  men  who  have  been  properly  organized 
so  as  efficiently  to  co-operate. 

This  paper  has  been  written: 

First.  To  point  out,  through  a  series  of  simple  illustrations,  the 
great  loss  which  the  whole  country  is  sufifering  through  inefficiency  in 
almost  all  of  our  daily  acts. 

Second.  To  try  to  convince  the  reader  that  the  remedy  for  this 
inefficiency  lies  in  systematic  management,  rather  than  in  searching 
for  some  imusual  or  extraordinary  man. 

Third.  To  prove  that  the  best  management  is  a  true  science, 
resting  upon  clearly  defined  laws,  rules,  and  principles,  as  a  founda- 
tion. And  further  to  show  that  the  fundamental  principles  of 
scientific  management  are  applicable  to  all  kinds  of  himian  activities, 
from  our  simplest  individual  acts  to  the  work  of  our  great  corporations, 
which  call  for  the  most  elaborate  co-operation.  And,  briefly,  through 
a  series  of  illustrations,  to  convince  the  reader  that  whenever  these 
principles  are  correctly  applied,  results  must  follow  which  are  truly 
astoimding. 

Under  the  old  type  of  management  success  depends  almost  entirely 
upon  getting  the  "initiative"  of  the  workmen,  and  it  is  indeed  a  rare 
case  in  which  this  initiative  is  really  attained.  Under  scientific 
management  the  "initiative"  of  the  workmen  (that  is,  their  hard 
work,  their  good-will,  and  their  ingenuity)  is  obtained  with  absolute 
uniformity  and  to  a  greater  extent  than  is  possible  tmder  the  old 
system;  and  in  addition  to  this  improvement  on  the  part  of  the  men, 
the  managers  assume  new  burdens,  new  duties,  and  responsibilities 
never  dreamed  of  in  the  past.  The  managers  assimie,  for  instance, 
the  burden  of  gathering  together  all  of  the  traditional  knowledge 
which  in  the  past  has  been  possessed  by  the  workmen  and  then  of 
classifying,  tabulating,  and  reducing  this  knowledge  to  rules,  laws, 

'  Adapted  from  F.  W.  Taylor,  The  Principles  of  Scientific  Management,  passim- 
Harper  &  Brothers,  1913.     (Copyright,  19 11,  by  Frederick  W.  Taylor.) 


2  20  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  formulae  which  are  immensely  helpful  to  the  workmen  in  doing 
their  daily  work.  In  addition  to  developing  a  science  in  this  way, 
the  management  take  on  three  other  types  of  duties  which  involve 
new  and  heavy  burdens  for  themselves. 

These  new  duties  are  grouped  under  four  heads: 

First.  They  develop  a  science  for  each  element  of  a  man's  work, 
which  replaces  the  old  rule-of-thumb  method. 

Second.  They  scientifically  select  and  then  train,  teach,  and 
develop  the  workman,  whereas  in  the  past  he  chose  his  own  work  and 
trained  himself  as  best  he  could. 

Third.  They  heartily  co-operate  with  the  men  so  as  to  insure  all 
of  the  work  being  done  in  accordance  with  the  principles  of  the 
science  which  has  been  developed. 

Fourth.  There  is  almost  equal  division  of  the  work  and  the  respon- 
sibility between  the  management  and  the  workmen.  The  manage- 
ment take  over  all  work  for  which  they  are  better  fitted  than  the 
workmen,  while  in  the  past  almost  all  of  the  work  and  the  greater 
part  of  the  responsibility  were  thrown  upon  the  men. 

II.    SOME  OF  THE  PRINCIPLES  OF  SCIENTIFIC  MANAGEMENT  EXPLAINED 

[The  author  presents  many  cases  of  scientific  study  of  industrial 
methods;  for  example,  "time  studies"  of  the  movements  required 
by  a  workman  in  doing  each  part  of  his  work,  scientific  study  of 
the  proper  types  of  implements  to  be  used,  investigations  of  the 
tiring  effect  of  heavy  labor  upon  a  first-class  man,  to  determine  the 
"law"  governing  the  proportion  of  the  day  during  which  the  laborer 
may  wisely  be  "under  load"  and  the  "law"  governing  the  frequency 
and  length  of  periods  of  rest,  etc.  Even  the  method  of  wage  payment, 
it  is  argued,  is  governed  by  "laws"  discovered  through  investigation 
of  the  motives  which  influence  men. — Editors.] 

Perhaps  the  most  important  law  belonging  to  this  class,  in  its 
relation  to  scientific  management,  is  the  effect  which  the  task  idea 
has  upon  the  efficiency  of  the  workman.  This,  in  fact,  has  become 
such  an  important  element  of  the  mechanism  of  scientific  management, 
that  by  a  great  number  of  people  scientific  management  has  come 
to  be  known  as  "task  management."  ....  The  average  work- 
man will  work  with  the  greatest  satisfaction,  both  to  himself  and  to 
his  employer,  when  he  is  given  each  day  a  definite  task  which  he  is 
to  perform  in  a  given  time,  and  which  constitutes  a  proper  day's 
work  for  a  good  workman.     This  furnishes  the  workman  with  a 


THE  ORGANIZATION  OF  INDUSTRY  221 

clear-cut  standard,  by  which  he  can  throughout  the  day  measure  his 
own  progress,  and  the  accomplishment  of  which  affords  him  the 
greatest  satisfaction. 

The  writer  has  described  in  other  papers  a  series  of  experiments 
made  upon  workmen,  which  have  resulted  in  demonstrating  the  fact 
that  it  is  impossible,  through  any  long  period  of  time,  to  get  workmen 
to  work  much  harder  than  the  average  men  around  them,  unless  they 
are  assured  a  large  and  a  permanent  increase  in  their  pay.  This 
series  of  experiments,  however,  also  proved  that  plenty  of  workmen 
can  be  found  who  are  willing  to  work  at  their  best  speed,  provided 
they  are  given  this  liberal  increase  in  wages.  The  workman  must, 
however,  be  fully  assured  that  this  increase  beyond  the  average  is  to 
be  permanent.  Our  experiments  have  shown  that  the  exact  percent- 
age of  increase  required  to  make  a  workman  work  at  his  highest 
speed  depends  upon  the  kind  of  work  which  the  man  is  doing. 

These  two  elements,  the  task  and  the  bonus  (which,  as  has  been 
pointed  out  in  previous  papers,  can  be  applied  in  several  ways), 
constitute  two  of  the  most  important  elements  of  the  mechanism  of 
scientific  management.  They  are  especially  important  from  the  fact 
that  they  are,  as  it  were,  a  climax,  demanding  before  they  can  be  used 
almost  all  of  the  other  elements  of  the  mechanism;  such  as  a  planning 
department,  accurate  time  study,  standardization  of  methods  and 
implements,  a  routing  system,  the  training  of  functional  foremen  or 
teachers,  and  in  many  cases  instruction  cards,  slide-rules,  etc. 

The  necessity  for  systematically  teaching  workmen  how  to  work 
to  the  best  advantage  has  been  referred  to.  It  seems  desirable,  there- 
fore, to  explain  in  rather  more  detail  how  this  teaching  is  done.  In 
the  case  of  a  machine  shop  which  is  managed  under  the  modern 
system,  detailed  written  instructions  as  to  the  best  way  of  doing  each 
piece  of  work  are  prepared  in  advance,  by  men  in  the  planning  depart- 
ment. These  instructions  represent  the  combined  work  of  several 
men  in  the  planning-room,  each  of  whom  has  his  own  specialty  or 
function.  One  of  them,  for  instance,  is  a  specialist  on  the  proper 
speeds  and  cutting  tools  to  be  used.  He  uses  specially  prepared  slide- 
rules  as  an  aid,  to  guide  him  in  obtaining  proper  speeds,  etc.  Another 
man  analyzes  the  best  and  quickest  motions  to  be  made  by  the  work- 
man in  setting  the  work  up  in  the  machine  and  removing  it,  etc. 
Still  a  third,  through  the  time-study  records  which  have  been  accumu- 
lated, makes  out  a  time-table  giving  the  proper  speed  for  doing  each 
element  of  the  work.    The  directions  of  all  of  these  men,  however. 


222  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

are  written  on  a  single  instruction  card  or  sheet.  Human  nature 
is  such,  however,  that  many  of  the  workmen,  if  left  to  themselves, 
would  pay  but  little  attention  to  their  written  instructions.  It  is 
necessary,  therefore,  to  provide  teachers  (called  functional  foremen) 
to  see  that  the  workmen  both  understand  and  carry  out  these  written 
instructions. 

Under  functional  management,  the  old-fashioned  single  foreman 
is  superseded  by  eight  different  men,  each  of  whom  has  his  own  special 


Diagram  Illustrating  the  Routes  of  Authority  under  the  1 
OR  Military  Type  of  Management' 

Traditional 

o 

666 

^ 

6 

6 

A  i  6 

O 

O 

o 

o 

6 

i 

6     6     o 

o 

o 

o 

duties,  and  these  men,  acting  as  the  agents  for  the  planning  depart- 
ment, are  the  expert  teachers,  who  are  at  all  times  in  the  shop  helping 
and  directing  the  workmen.  Being  each  one  chosen  for  his  knowledge 
and  personal  skill  in  his  specialty,  they  are  able  not  only  to  tell  the 
workman  what  he  should  do,  but  in  case  of  necessity  they  do  the 
work  themselves  in  the  presence  of  the  workman,  so  as  to  show  him 
not  only  the  best  but  also  the  quickest  methods. 

One  of  these  teachers  (called  the  inspector)  sees  to  it  that  he 
understands  the  drawings  and  instructions  for  doing  the  work.    He 

'This  diagram  is  taken  from  Frank  B.  Gilbreth,  "Units,  Methods,  and 
Devices  of  Measurement  under  Scientific  Management,"  in  The  Journal  of  Political 
Economy,  XXI,  619  (July,  1913). 


THE  ORGANIZATION  OF  INDUSTRY 


223 


teaches  him  how  to  do  work  of  the  right  quality;  how  to  make  it  fine 
and  exact  where  it  should  be  fine,  and  rough  and  quick  where  accuracy 
is  not  required — the  one  being  just  as  important  for  success  as  the 
other.  The  second  teacher  (the  gang  boss)  shows  him  how  to  set  up 
the  job  in  his  machine,  and  teaches  him  to  make  all  of  his  personal 
motions  in  the  quickest  and  best  way.  The  third  (the  speed  boss) 
sees  that  the  machine  is  rim  at  the  best  speed  and  that  the  proper 

Diagram  Illustratikg  the  Principle  of  Functional  or  Scientific 

Management' 


^ 

1 

[      SUPT 

/ORDER    Or\ 
WORK       1 

/iNSTRUCTIOin 

/ 

TIME  AND  \ 

/DISCIPUM-) 

V     ROUTE    / 

I     CARDS     J 

V 

COST     j 

I      ARIAM     j 

PLAMNIRC 

X?*?X 

V^ 

\ 

\^ 

PCRFORMINQ 

r^ 

/'^\\ 

f 

/ 

^'e^N 

h^ 

'     GANG      V 

L  /      SFtEO     \ 
U      BOSS       i 

i 

10 

REPAIRS    J 

'& 

TiNOIV 

IDUAL  1 

tool  is  used  in  the  particular  way  which  will  enable  the  machine  to 
finish  its  product  in  the  shortest  possible  time.  In  addition  to  the 
assistance  given  by  these  teachers,  the  workman  receives  orders  and 
help  from  four  other  men:  from  the  "repair  boss"  as  to  the  adjust- 
ment, cleanliness,  and  general  care  of  his  machine,  belting,  etc.; 
from  the  "time  clerk,"  as  to  everything  relating  to  his  pay  and  to 
proper  written  reports  and  returns;   from  the  "route  clerk,"  as  to 

'This  diagram  is  taken  from  Frank  B.  Gilbreth,  "Units,  Methods,  and 
Devices  of  Measurement  under  Scientific  Management,"  in  The  Journal  of  PolUlcci 
Economy,  XXI,  619  (July,  1913). 


224  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  order  in  which  he  does  his  work  and  as  to  the  movement  of  the 
work  from  one  part  of  the  shop  to  another;  and,  in  case  a  workman 
gets  into  any  trouble  with  any  of  his  various  bosses,  the  "discipli- 
narian" interviews  him. 

The  history  of  the  development  of  scientific  management  up  to 
date,  however,  calls  for  a  word  of  warning.  The  mechanism  of 
management  must  not  be  mistaken  for  its  essence,  or  underlying 
philosophy.    As  elements  of  this  mechanism  may  be  cited: 

Time  study,  with  the  implements  and  methods  for  properly 
making  it. 

Functional  or  divided  foremanship  and  its  superiority  to  the  old- 
fashioned  single  foreman. 

The  standardization  of  all  tools  and  implements  used  in  the 
trades,  and  also  of  the  acts  or  movements  of  workmen  for  each  class 
of  work. 

The  desirability  of  a  planning-room  or  department. 

The  "exception  principle"  in  management. 

The  use  of  slide-rules  and  similar  time-saving  implements. 

Instruction  cards  for  the  workman. 

The  task  idea  in  management,  accompanied  by  a  large  bonus 
for  the  successful  performance  of  the  task. 

The  "differential  rate." 

Mnemonic  systems  for  classifying  manufactured  products  as  well 
as  implements  used  in  manufacturing. 

A  routing  system. 

Modern  cost  system,  etc.,  etc. 

These  are,  however,  merely  the  elements  or  details  of  the  mechan- 
ism of  management.  Scientific  management,  in  its  essence,  consists 
of  a  certain  philosophy,  which  results,  as  before  stated,  in  a  combina- 
tion of  the  four  great  underlying  principles  of  management:  first.  The 
development  of  a  true  science;  second.  The  scientific  selection  of  the 
workman;  third,  His  scientific  education  and  development;  fourth. 
Intimate  friendly  co-operation  between  the  management  and  the  men. 

m.    SOME    ILLUSTRATIONS    OF    THE    APPLICATION    OF    THE    PRINCIPLES 

OF   SCIENTIFIC   MANAGEMENT 

A  number  of  years  ago  a  company  employing  about  three  hundred 
men,  which  had  been  manufacturing  the  same  machine  for  from  ten 
to  fifteen  years,  sent  for  us  to  report  as  to  whether  any  gain  could  be 
made  through  the  introduction   of  scientific  management.    Their 


THE  ORGANIZATION  OF  INDUSTRY  225 

shops  had  bieen  run  for  many  years  under  a  good  superintendent  and 
with  excellent  foremen  and  workmen,  on  piecework.  The  whole 
establishment  was,  without  doubt,  in  better  physical  condition  than 
the  average  machine  shop  in  this  country.  The  superintendent  was 
distinctly  displeased  when  told  that  through  the  adoption  of  task 
management  the  output,  with  the  same  number  of  men  and  machines, 
could  be  more  than  doubled.  He  said  that  he  believed  that  any  such 
statement  was  mere  boasting,  absolutely  false,  and  instead  of  inspir- 
ing him  with  confidence,  he  was  disgusted  that  anyone  should  make 
such  an  impudent  claim.  He,  however,  readily  assented  to  the  propo- 
sition that  he  should  select  any  one  of  the  machines  whose  output  he 
considered  as  representing  the  average  of  the  shop,  and  that  we  should 
then  demonstrate  on  this  machine  that  through  scientific  methods 
its  output  could  be  more  than  doubled. 

The  machine  selected  by  him  fairly  represented  the  work  of  the 
shop.    It  had  been  run  for  ten  or  twelve  years  past  by  a  first-class 
mechanic  who  was  more  than  equal  in  his  ability  to  the  average 
workmen  in  the  establishment.     In  a  shop  of  this  sort,  in  which 
similar  machines  are  made  over  and  over  again,  the  work  is  neces- 
sarily greatly  subdivided,  so  that  no  one  man  works  upon  more  than 
a  comparatively  small  number  of  parts  during  the  year.    A  careful 
record  was  therefore  made,  in  the  presence  of  both  parties,  of  the 
time  actually  taken  in  finishing  each  of  the  parts  which  this  man 
worked  upon.    The  total  time  required  by  him  to  finish  each  piece, 
as  well  as  the  exact  speeds  and  feeds  which  he  took,  were  noted,  and 
a  record  was  kept  of  the  time  which  he  took  in  setting  the  work  in 
the  machine  and  removing  it.    After  obtaining  in  this  way  a  state- 
ment of  what  represented  a  fair  average  of  the  work  done  in  the  shop, 
we  applied  to  this  one  machine  the  principles  of  scientific  management. 
By  means  of  four  quite  elaborate  slide-rules,  which  have  been 
especially  made  for  the  purpose  of  determining  the  all-round  capacity 
of  metal-cutting  machines,  a  careful  analysis  was  made  of  every 
element  of  this  machine  in  its  relation  to  the  work  in  hand.    Its 
pulling  power  at  its  various  speeds,  its  feeding  capacity,  and  its 
proper  speeds  were  determined  by  means  of  the  slide-rules,  and 
changes  were  then  made  in  the  countershaft  and  driving  pulleys  so 
as  to  nm  it  at  its  proper  speed.    Tools,  made  of  high-speed  steel, 
and  of  the  proper  shapes,  were  properly  dressed,  treated,  and  ground. 
(It  should  be  understood,  however,  that  in  this  case  the  high-speed 
steel  which  had  heretofore  been  in  general  use  in  the  shop  was  also 


226  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

used  in  our  demonstration.)  A  large  special  slide-rule  was  then  made, 
by  means  of  which  the  exact  speeds  and  feeds  were  indicated  at  which 
each  kind  of  work  could  be  done  in  the  shortest  possible  time  in  this 
particular  lathe.  After  preparing  in  this  way  so  that  the  workman 
should  work  according  to  the  new  method,  one  after  another,  pieces 
of  work  were  finished  in  the  lathe,  corresponding  to  the  work  which 
had  been  done  in  our  preliminary  trials,  and  the  gain  in  time  made 
through  running  the  machine  according  to  scientific  principles  ranged 
from  two  and  one-half  times  the  speed  in  the  slowest  instance  to 
nine  times  the  speed  in  the  highest. 

[In  the  case  of  a  factory  where  a  stafiF  of  girls  inspected  balls  to 
be  used  in  the  bearings  of  bicycles] — the  final  outcome  of  all  the 
changes  was  that  thirty-five  girls  did  the  work  formerly  done  by  one 
hundred  and  twenty.  And  that  the  accuracy  of  the  work  at  the  higher 
speed  was  two-thirds  greater  than  at  the  former  slow  speed. 

The  good  that  came  to  the  girls  was:  first,  that  they  averaged 
from  80  to  100  per  cent  higher  wages  than  they  formerly  received; 
second,  their  hours  of  labor  were  shortened  from  105  to  87  per  day, 
with  a  Saturday  half-holiday,  and  they  were  given  four  recreation 
periods  properly  distributed  through  the  day,  which  made  overwork- 
ing impossible  for  a  healthy  girl;  third,  each  girl  was  made  to  feel 
that  she  was  the  object  of  especial  care  and  interest  on  the  part  of 
the  management,  and  that  if  anything  went  wrong  with  her  she 
could  always  have  a  helper  and  teacher  in  the  management  to  lean 
upon. 

The  benefits  which  came  to  the  company  from  these  changes 
were:  first,  a  substantial  improvement  in  the  quaUty  of  the  product; 
second,  a  material  reduction  in  the  cost  of  inspection,  in  spite  of  the 
extra  expense  involved  in  clerk  work,  teachers,  time  study,  over- 
inspectors,  and  in  paying  higher  wages;  third,  that  the  most  friendly 
relations  existed  between  the  management  and  the  employees,  which 
rendered  labor  troubles  of  any  kind  or  a  strike  impossible. 

Brickla>ang  is  one  of  the  oldest  of  our  trades.  For  hundreds  of 
years  there  has  been  little  or  no  improvement  made  in  the  imple- 
ments and  materials  used  in  this  trade,  nor  in  fact  in  the  method  of 
laying  bricks.  In  spite  of  the  millions  of  men  who  have  practiced 
this  trade,  no  great  improvement  has  been  evolved  for  many  gener- 
ations.   Here,  then,  at  least,  one  would  expect  to  find  but  little  gain 


THE  ORGANIZATION  OF  INDUSTRY  227 

possible  through  scientific  analysis  and  study.  Mr.  Frank  B.  Gilbreth 
who  had  himself  studied  bricklaying  in  his  youth,  became  interested 
in  the  principles  of  scientific  management,  and  decided  to  apply 
them  to  the  art  of  bricklaying.  He  made  an  intensely  interesting 
analysis  and  study  of  each  movement  of  the  bricklayer,  and  one 
after  another  eliminated  all  unnecessary  movements  and  substituted 
fast  for  slow  motions.  He  experimented  with  every  minute  element 
which  in  any  way  affects  the  speed  and  the  tiring  of  the  bricklayer. 

He  developed  the  exact  position  which  each  of  the  feet  of  the 
bricklayer  shovild  occupy  with  relation  to  the  wall,  the  mortar  box, 
and  the  pile  of  bricks,  and  so  made  it  unnecessary  for  him  to  take 
a  step  or  two  toward  the  pile  of  bricks  and  back  again  each  time  a 
brick  is  laid. 

He  studied  the  best  height  for  the  mortar  box  and  brick  pile,  and 
then  designed  a  scaffold,  with  a  table  on  it,  upon  which  all  of  the 
materials  are  placed,  so  as  to  keep  the  bricks,  the  mortar,  the  man, 
and  the  wall  in  their  proper  relative  positions.  These  scaffolds  are 
adjusted,  as  the  wall  grows  in  height,  for  all  of  the  bricklayers  by  a 
laborer  especially  detailed  for  this  purpose,  and  by  this  means  the 
bricklayer  is  saved  the  exertion  of  stooping  down  to  the  level  of  his 
feet  for  each  brick  and  each  trowelful  of  mortar  and  then  straighten- 
ing up  again. 

As  a  result  of  further  study,  after  the  bricks  are  unloaded  from 
the  cars,  and  before  bringing  them  to  the  bricklayer,  they  are  care- 
fully sorted  by  a  laborer,  and  placed  with  their  best  edge  up  on  a 
simple  wooden  frame,  constructed  so  as  to  enable  him  to  take  hold 
of  each  brick  in  the  quickest  time  and  in  the  most  advantageous 
position.  In  this  way  the  bricklayer  avoids  either  having  to  turn 
the  brick  over  or  end  for  end  to  examine  it  before  laying  it,  and  he 
saves,  also,  the  time  taken  in  deciding  which  is  the  best  edge  and  end 
to  place  on  the  outside  of  the  wall.  In  most  cases,  also,  he  saves 
the  time  taken  in  disentangling  the  brick  from  a  disorderly  pile  on 
the  scaffold.  This  "pack"  of  bricks  (as  Mr.  Gilbreth  calls  his 
loaded  wooden  frames)  is  placed  by  the  helper  in  its  proper  position 
on  the  adjustable  scaffold  close  to  the  mortar  box. 

We  have  all  been  used  to  seeing  bricklayers  tap  each  brick  after 
it  is  placed  on  its  bed  of  mortar  several  times  with  the  end  of  the 
handle  of  the  trowel  so  as  to  secure  the  right  thickness  for  the  joint. 
Mr.  Gilbreth  found  that  by  tempering  the  mortar  just  right,  the 
bricks  could  be  readily  bedded  to  the  proper  depth  by  a  downward 


228  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

pressure  of  the  hand  with  which  they  are  laid.  He  insisted  that  his 
mortar  mixers  should  give  special  attention  to  tempering  the  mortar, 
and  so  save  the  time  consumed  in  tapping  the  brick. 

Through  all  of  this  minute  study  of  the  motions  to  be  made  by 
the  bricklayer  in  laying  bricks  under  standard  conditions,  Mr.  Gilbreth 
has  reduced  his  movements  from  eighteen  motions  per  brick  to  five, 
and  even  in  one  case  to  as  low  as  two  motions  per  brick.  He  reports 
that  a  few  months  ago,  in  a  large  brick  building  which  he  erected,  he 
demonstrated  on  a  commercial  scale  the  great  gain  which  is  possible 
from  practically  applying  his  scientific  study.  With  union  brick- 
layers, in  laying  a  factory  wall,  twelve  inches  thick,  with  two  kinds 
of  brick,  faced  and  ruled  joints  on  both  sides  of  the  wall,  he  averaged, 
after  his  selected  workmen  had  become  skilful  in  his  new  methods, 
350  bricks  per  man  per  hour;  whereas  the  average  speed  of  doing 
this  work  with  the  old  methods  was,  in  that  section  of  the  country, 
120  bricks  per  man  per  hour.  His  bricklayers  were  taught  his  new 
method  of  bricklaying  by  their  foreman.  Those  who  failed  to  profit 
by  their  teaching  were  dropped,  and  each  man,  as  he  became  pro- 
ficient under  the  new  method,  received  a  substantial  (not  a  small) 
increase  in  wages. 

The  writer  has  gone  thus  fully  into  Mr.  Gilbreth 's  method  in  order 
that  it  may  be  perfectly  clear  that  this  increase  in  output  and  that  this 
harmony  could  not  have  been  attained  under  the  management  of  "ini- 
tiative and  incentive"  (that  is,  by  putting  the  problem  up  to  the  work- 
man and  leaving  him  to  solve  it  alone)  which  has  been  the  philosophy 
of  the  past.  And  that  his  success  has  been  due  to  the  use  of  the  four 
elements  which  constitute  the  essence  of  scientific  management. 

63.   CRITICISMS  OF  SCIENTIFIC  MANAGEMENT' 

There  have  been  nine  principal  criticisms  of  scientific  manage- 
ment. Three  are  concerned  with  its  effect  on  the  individual  workman 
physically  and  temperamentally.  The  others  are  concerned  with  its 
influence  on  labor  as  a  productive  group. 

First. — The  taking  of  time  studies  and  the  determination  and 
setting  of  a  task  are  a  reflection  upon  the  good  faith  of  labor.  It  sets 
up  the  relationship  of  master  and  slave.  This  criticism  is  undoubtedly 
prompted  by  a  sensitiveness  which  is  aroused  by  too  much  emphasis, 

'  Adapted  from  pp.  10-16  of  H.  S.  Person's  introduction  to  the  volume  of 
Addresses  and  Discussions  at  the  Conference  on  Scientific  Management  held  by  the 
Amos  Tuck  School  of  Dartmouth  College,  October  12,  13,  14,  191 1. 


THE  ORGANIZATION  OF  INDUSTRY  229 

in  expositions  of  scientific  management,  upon  the  treatment  of  labor. 
Most  expositions  have  been  for  the  benefit  of  management,  and  have 
emphasized  the  handling  of  labor.  In  the  application  of  scientific 
management,  however,  the  managerial  force  is  studied  just  as  keenly 
and  reorganized  just  as  thoroughly  as  is  the  labor  force.  Each  person 
concerned  with  the  executive  operations  has  a  task  and  is  held  strictly 
accountable  for  its  performance.  In  plants  in  which  scientific  man- 
agement has  been  applied,  and  in  such  plants  only,  is  labor  enabled  to 
judge  of  the  efficiency  of  the  executive  force  and  to  hold  it  up  to 
established  standards  of  efficiency.  Scientific  management  recog- 
nizes no  difference,  in  determining  standards  of  efficiency,  between 
management,  capital  goods,  and  labor. 

Second. — The  removal  from  the  workman  of  individual  responsi- 
bility for  determining  the  method  of  an  operation  and  leaving  to  him 
attention  to  the  skilful  performance  only,  makes  his  work  uninteresting 
and  monotonous  and  is  bound  to  stunt  him  intellectually.  My  own 
observations  and  the  observations  of  others  in  plants  where  scientific 
management  has  been  applied  do  not  support  this  criticism.  The 
first  error  in  the  criticism  is  the  assumption  that  taking  from  the  work- 
man the  necessity  of  going  after  and  selecting  the  proper  kinds  of 
material,  tools,  etc. — and  that  is  one  of  the  principal  responsibilities 
of  which  the  redistribution  of  duties  deprives  him — takes  from  him 
something  intellectually  stimulating.  Another  error  is  the  assump- 
tion that  performing  an  operation  according  to  the  best  method  is 
intellectually  less  stimulating  than  performing  it  according  to  an 
inefficient  method.  A  third  error  is  the  assumption  that  a  method 
handed  down  by  tradition  is  intellectually  more  stimulating  than  a 
method  derived  by  experiment. 

Third. — The  effect  of  scientific  management  is  to  '^ speed  up"  the 
workman,  wear  him  out,  and  cause  him  to  be  cast  aside.  Again, 
actual  investigation  in  plants  so  organized  does  not  support  this  criti- 
cism. Its  error  is  the  assvunption  that  the  increased  productivity 
comes  from  a  greater  expenditure  of  muscular  and  nervous  energy  in 
a  working  day.  The  increased  productivity  comes,  however,  from 
other  things;  from  saving  in  overhead  charges,  from  the  using  of 
material  in  a  predetermined  correct  way,  from  the  using  of  machinery 
in  a  predetermined  most  efficient  way,  from  the  elimination  of  the  time 
a  workman  wastes  in  going  after  material  and  tools,  from  the  elimina- 
tion of  the  misapplication  of  muscular  and  nervous  energy  in  unneces- 
sary motions,  and  from  compulsory  periods  of  rest,  even,  which  the 


230  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

workman  will  ordinarily  not  take  for  himself.  The  beginner  at  goU 
expends  more  energy  in  a  round  of  nine  holes  than  the  experienced 
player  in  a  round  of  eighteen;  the  skilful  carpenter  expends  far  less 
energy  in  planing  a  board  than  does  the  novice.  Scientific  manage- 
ment strives  to  teach  the  workman  skill,  and  to  prevent  over-exertion 
as  much  as  to  prevent  loafing.  One  of  the  most  impressive  things  tc 
the  visitor  at  a  plant  so  organized  is  the  absence  on  the  one  hand  oi 
loitering  and  on  the  other  hand  of  haste. 

Fourth. — Scientific  management  is  inapplicable  because  of  tht 
mobility  of  labor;  to  teach  the  laborer  the  best  method  requires  thai 
he  be  retained  for  a  period,  but  as  a  rule  labor  is  continually  coming 
into  and  going  out  of  a  plant,  and  before  a  laborer  becomes  skilful  ht 
is  of  and  a  new,  awkward  man  has  been  hired  to  take  his  place.  This 
criticism  over-emphasizes  the  mobility  of  labor;  it  premises  a  mobility 
which  the  average  manager  does  not  experience.  I  once  asked  the 
manager  of  a  plant  organized  according  to  the  principles  of  scientific 
management  what  was  the  average  time  a  workman  remained  with 
him.  Eight  years,  he  replied.  He  stated  further  that  the  average 
time  was  increasing  under  the  new  conditions  of  organization.  Scien- 
tific management  carries  with  it  its  own  corrective  of  the  loss  which 
comes  from  too  great  a  mobility  of  labor.  The  fact  that  a  workman  is 
permitted  to  work  under  conditions  which  render  him  more  produc- 
tive and  that  he  is  paid  according  to  his  ability  keeps  him  in  the  plant. 

Fifth. — //  inaugurates  a  spying  system  among  the  laborers  which 
results  in  mutual  distrust,  quarrels,  and  absence  of  esprit.  I  do  not 
know  what  is  meant  by  spying  system,  unless  it  refers  to  the  supposed 
fact  that,  in  a  sequence  of  processes,  if  one  workman  fails  to  keep  up 
to  standard,  it  will  cause  loss  to  another  workman  who  to  protect 
himself  will  have  to  complain  of  the  first  workman.  This  criticism  is 
due  to  assumptions  concerning  scientific  management  which  are  not 
true.  No  workman  has  to  complain  of  another;  if  a  workman  is 
derelict  the  fact  is  reported  automatically  to  the  management  by  the 
impersonal  time  slip,  and  it  is  the  duty  of  management  to  relieve  the 
situation  before  any  other  workman  can  become  aware  of  it.  The 
relationship  is  not  between  workman  and  workman,  but  between  work- 
man and  the  order-of-work  clerk.  The  persons  of  whom  the 
workman  may  have  occasion  to  complain  are  those  in  the  routing,  an 
executive,  department.  And  as  a  matter  of  fact,  finally,  I  have  not 
observed,  and  no  one  has  reported  that  he  has  observed,  in  a  plant  in 
which  scientific  management  has  become  well  established,  any  lack  of 


THE  ORGANIZATION  OF  INDUSTRY  231 

harmony  in  the  labor  force;  on  the  contrary,  it  is  the  consensus  of 
opinion  that  a  fine  spirit  of  co-operation  is  conspicuous  in  such  plants. 

Sixth. — Workmen  have  had  a  bitter  experience  with  the  piece- 
rate  system;  have  been  ^^  speeded  up^'  by  increases  in  piece-rates  only 
to  have  the  rates  cut.  May  not  the  differential  wage  system  of  scientific 
management  be  used  against  the  workman  in  a  similar  way?  This 
is  a  reasonable  question.  Such  a  manipulation  of  the  diflferential 
wage  system  seems  to  me  to  be  possible,  but  I  doubt  whether  it  is 
probable.  In  the  first  place,  the  experience  of  manufacturers  who 
have  reduced  piece-rates  has  been  as  bitter  as  the  experience  of  the 
laborer.  They  are  coming  to  consider  the  rate-cutting  of  the  past  as 
one  of  the  great  blunders  of  management.  It  will  take  exceedingly 
strong  temptation  to  induce  them  to  try  it  again.  In  the  second 
place,  piece-rates  in  the  past  have  been  established  without  a  sufficient 
knowledge  of  the  conditions  of  production.  They  gave  to  the  work- 
man all  the  increase  of  production  except  that  resulting  from  reduc- 
tion in  overhead  costs.  The  invention  of  new  and  improved  machines 
brought  practically  notliing  to  management,  and  placed  it  at  a  dis- 
astrous disadvantage  in  competition  with  firms  paying  day-wages,  to 
which  came  all  the  advantages  of  the  introduction  of  more  efficient 
machines.  Rate-cutting  was  compelled  by  the  circumstances  of 
competition.  Under  scientific  management,  on  the  other  hand,  rates 
are  determined  only  after  exhaustive  investigations  of  the  productivity 
of  a  laborer  in  combination  with  a  given  machine,  and  a  separate  rate 
is  established  for  every  such  combination.  If  a  new  and  more  efficient 
machine  is  introduced,  a  new  rate  is  established  as  the  result  of  a  new 
investigation.  So  long  as  plants  organized  under  scientific  manage- 
ment enjoy  the  resulting  differential  advantage  in  competition  with 
plants  paying  day-wages,  there  will  be  little  danger  of  rate-cutting, 
for  in  proportion  as  the  earnings  of  workmen  increase  does  the  unit 
cost  of  the  product  decrease.  If  the  time  should  come,  as  it  is  reason- 
able to  expect  it  will  come,  when  all  plants  in  a  competitive  industry 
should  be  organized  according  to  the  principles  of  scientific  manage- 
ment, so  that  the  differential  advantage  would  no  longer  exist,  there 
might  be  temptation  to  rate-cutting.  But  under  those  conditions  the 
temptation  would  be  no  greater  than  to  cut  under  the  day-wage  sys- 
tem. And  if  unions  still  existed  labor  would  be  in  as  good  a  position 
to  protect  itself  in  the  one  case  as  in  the  other. 

Seventh. — The  increase  of  efficiency  which  results  from  scientific 
management  will  throw  labor  out  of  employment.    The   untenable 


232  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

assertion  that  such  would  be  its  ultimate  effect  is  not  deserving  of 
serious  consideration.  But  that  there  may  be  temporarily  such  a 
result  in  a  given  industry  is  possible,  if  increased  demand  resulting 
from  decreased  selling  price  should  not  pari  passu  accompany  in- 
creased eflSciency  in  production.  It  is  good  economics  to  assume  that 
in  the  long  run  improved  methods  will  make  emplo)Tnent  for  a  larger 
number  of  persons;  but  it  is  also  good  sense  for  the  laborer  to  take 
into  consideration  the  possible  immediate  consequences  of  lack  of 
employment  for  a  season.  The  saving  factor  in  the  situation  is  that 
scientific  management  cannot  be  applied  in  a  day.  To  apply  it  to  a 
given  plant  is  a  matter  of  years.  The  organizing  engineers  capable 
of  applying  it  with  such  results  in  increased  productive  efficiency  as 
have  been  of  late  brought  to  our  attention  are  and  always  will  be  few. 
If  there  is  an  impending  revolution  in  industry  comparable  to  the 
revolution  at  the  beginning  of  the  nineteenth  century,  it  will  be  quite 
different  in  at  least  one  respect:  systems  of  scientific  management  will 
not  be  tiuTied  out  as  was  cotton  and  power  machinery,  in  great  quanti- 
ties at  a  relatively  low  cost  and  standardized  to  fit  any  and  all  plants. 
Each  plant  presents  a  distinct  problem  to  the  organizing  engineer,  a 
problem  of  several  years'  duration.  There  can  therefore  never  be  un- 
employment of  a  large  body  of  men  on  account  of  sudden,  widespread, 
more  efficient  organization.  The  firms  which  introduce  scientific  man- 
agement usually  enjoy  such  a  differential  advantage  that  they  are  able 
to  make  prices  which  enable  them  to  increase  their  plants  so  as  to  take 
care  of  the  small  amount  of  what  would  otherwise  be  surplus  labor. 
Eighth. — It  is  asserted  that  labor  is  not  allowed  to  help  fix  the 
rate  of  compensation.  Labor  has  as  yet  expressed  no  desire  to  do  so. 
In  all  cases  of  reorganization  rates  have  been  fixed  so  that  labor  has 
been  able  to  earn  more  than  it  has  demanded.  If  the  time  should 
come,  as  it  surely  will  come,  when  labor  asks  to  be  allowed  a  voice  in 
establishing  differential  rates  under  scientific  management,  there  is 
nothing  in  the  nature  of  that  form  of  organization  to  make  it  impos- 
sible. On  the  contrary,  it  is  probable  that  such  co-operation  between 
management  and  labor  would  work  out  more  smoothly  than  under 
present  conditions.  The  method  of  determining  what  the  combina- 
tion of  a  machine  and  a  man  can  do  is  so  scientifically  accurate  that 
facts  could  be  easily  ascertained,  and  both  labor  and  manager  are 
reasonable  when  they  know  the  facts.  Whether  labor  would  enjoy 
the  opportunity  of  helping  fix  rates  would  depend  on  the  solidarity 
of  the  group  in  making  its  demand. 


THE  ORGANIZATION  OF  INDUSTRY  233 

Ninth. — It  is  asserted  that  scientific  management  would  impair 
the  solidarity  of  labor;  that  it  would  break  down  unionism  by  substi- 
tuting individual  bargaining  in  the  place  of  collective  bargaining  for 
which  unionism  is  now  struggling.  Scientific  management  aims  to  do 
away  with  equal  payment  to  all  laborers  irrespective  of  their  pro- 
ductivity, but  it  does  not  aim  to  do  away  with  collective  bargaining. 
It  is  possible  under  scientific  management  for  a  union  through  its 
selected  representatives  to  take  a  part  in  determining  what  is  the 
best  method  of  performing  an  operation,  what  would  be  a  reasonable 
task,  and  what  would  be  a  reasonable  division  of  the  increased  returns. 
These  things  once  determined,  it  would  have  to  permit  its  individual 
members  to  be  paid  according  to  their  individual  contributions  to  the 
increased  returns.  Scientific  management  would  impair  the  solidarity 
of  unionism  to  the  extent  that  that  solidarity  is  dependent  upon  flat 
hour-rates  for  aU  men;  it  would  not  impair  the  solidarity  by  miaking 
collective  bargaining  impossible. 

I  have  not  enmnerated  as  a  criticism  of  scientific  management  the 
assertion  that  a  great  number  of  inefficient,  of  "fake,"  organizing 
engineers  is  likely  to  arise  to  exploit  the  new  profession  and  to  work 
havoc  with  those  plants  whose  managers  they  induce  to  accept  their 
services.  It  is  a  real  danger,  but  it  is  not  a  legitimate  criticism  of 
scientific  management.  Managers  should  realize  that  ability  to  organ- 
ize successfully  a  business  depends  upon  a  combination  of  qualities  not 
found  together  in  many  men — largeness  of  vision,  capacity  for  details, 
patience,  tact  which  is  bom  of  sympathy,  the  capacity  to  analyze  and 
to  combine,  and  scientific  knowledge  of  technical  processes. 

64.   PARTNERSHIP  ARTICLES 

James  E.  Smith  and  John  Doe,  both  of  the  City  of  Chicago, 
Illinois,  hereby  mutually  agree  to  become  partners  under  the  firm 
name  of  "Smith  &  Doe"  to  conduct  the  trade  and  business  of  printing 
in  the  said  city  for  the  period  of  five  years  from  date. 

The  said  Smith  invests  his  stock  of  presses,  paper,  ink,  and  other 
material,  estimated  to  be  worth  ten  thousand  dollars,  and  the  said 
Doe  invests  ten  thousand  dollars  in  cash. 

Both  partners  shall  give  their  entire  time  and  shall  share  losses 
and  gains  equally. 

All  amounts  earned  or  received  by  either  partner  for  work,  mate- 
rials, or  anything  pertaining  to  the  business,  shall  be  deposited  in  the 
First  National  Bank  of  Chicago  in  the  name  of  both  partners,  and 


234  MATERIALS  FOR  ELExMENTARY  ECONOMICS 

shall  be  checked  out  as  needed  for  expenses  and  supplies,  by  the 
signatures  of  both  partners,  and  an  equal  amount  shall  be  drawn 
each  Monday  morning  for  each  partner  for  personal  expenses,  but 
a  balance  of  five  hundred  dollars  shall  always  be  kept  and  held. 

When  the  firm  shall  be  dissolved  the  balance  on  hand  shall  be 
divided  equally  and  all  debts  shall  be  paid  from  the  money  in  bank, 
after  which  the  money  shall  be  divided  equally  between  the  partners. 

Witness  our  hands  and  seals  this  25th  day  of  October,  1911. 
Attest:  James.  E.  Smith,  [l.s.] 

Charles  Robinson  John  Doe.  [l.s.] 

65.  FORM  OF  CORPORATION  CHARTER 

Certificate  of  Incorporation 

We,  the  undersigned,  in  order  to  form  a  corporation  for  the  pur- 
poses hereinafter  set  forth,  under  and  pursuant  to  the  provisions  of 
the  Act  of  the  Legislature  of  the  State  of  New  Jersey,  entitled  "  An 
Act  Concerning  Corporations  (Revision  of  1896),"  and  the  acts 
amendatory  thereof  and  supplemental  thereto,  do  hereby  certify  as 
follows: 

ARTICLE  I 

The  name  of  the  corporation  is: 

ARTICLE  n 

The  principal  and  registered  office  of  the  Company  is  in  the 

Building  ,  New  Jersey,  and  the  name  of  the 

agent  therein  and  in  charge  thereof,  and  upon  whom  process  against 
this  corporation  may  be  served,  is 

ARTICLE   III 

The  objects  for  which  and  for  each  of  which  the  corporation  is 
formed  are:* 

It  is  the  intention  that  the  objects,  purposes,  and  powers  specified 
in  the  clauses  contained  in  this  third  paragraph  shall,  except  where 
otherwise  expressed  in  said  paragraph,  be  nowise  limited  or  restricted 
by  reference  to  or  inference  from  the  terms  of  any  other  clause  of 
this  or  any  other  paragraph  in  this  charter,  but  that  the  objects, 

'  [This  "object  clause"  varies  with  the  nature  of  the  business.  Ordinarily  it 
is  comparatively  simple,  but  it  may  be  made  very  broad  and  comprehensive,  as  in 
the  case  of  the  U.S.  Steel  Corporation,  given  in  the  following  selection. — Editors.] 


THE  ORGANIZATION  OF  INDUSTRY  235 

purposes,  and  powers  specified  in  each  of  the  clauses  of  this  para- 
graph shall  be  regarded  as  independent  objects,  purposes,  and 
powers. 

ARTICLE   IV 

The  following  provisions  for  the  regulation  of  the  business  and 
the  conduct  of  the  affairs  of  the  Company  are  hereby  established: 

The  corporation  may  use  and  apply  its  surplus  earnings  or  accu- 
mulated profits  authorized  by  law  to  be  reserved  to  the  purchase  or 
acquisition  of  property,  and  to  the  purchase  or  acquisition  of  its  own 
capital  stock  from  time  to  time,  to  such  extent  and  in  such  manner 
and  upon  such  terms  as  its  Board  of  Directors  shall  determine;  and 
neither  the  property  nor  the  capital  stock  so  purchased  and  acqiiired, 
nor  any  of  its  capital  stock  taken  in  payment  or  satisfaction  of  any 
debt  due  to  the  corporation,  shall  be  regarded  as  profits  for  the  pur- 
poses of  declaration  or  payment  of  dividends,  unless  otherwise  deter- 
mined by  a  majority  of  the  Board  of  Directors  or  a  majority  of  the 
stockholders. 

The  corporation  in  its  by-laws  may  prescribe  the  number  neces- 
sary to  constitute  a  quorum  of  the  Board  of  Directors,  which  number 
may  be  less  than  a  majority  of  the  whole  number. 

The  Board  of  Directors  shall  have  power,  without  the  assent  or 
vote  of  the  stockholders,  to  make,  alter,  rescind,  or  amend  the  by-laws 
of  the  corporation,  to  fix  the  amount  to  be  reserved  as  working  capi- 
tal, to  authorize  and  cause  to  be  executed  mortgages  and  liens  upon 
the  real  and  personal  property  of  the  corporation;  and  from  time 
to  time  to  sell,  assign,  transfer,  or  otherwise  dispose  of  any  or  all 
of  the  property  of  the  corporation,  but  no  such  sale  of  all  the  property 
shall  be  made  except  pursuant  to  the  vote  of  at  least  two-thirds  of  the 
Board  of  Directors. 

The  Board  of  Directors  from  time  to  time  shall  determine  whether 
and  to  what  extent,  and  at  what  times  and  places,  and  under  what 
conditions  and  regulations,  the  accounts  and  books  of  the  corpora- 
tion, or  any  of  them,  shall  be  open  to  the  inspection  of  the  stock- 
holders; and  no  stockholder  shall  have  any  right  of  inspecting  any 
account  or  book  or  document  of  the  corporation,  except  as  conferred 
by  statute  or  authorized  by  the  Board  of  Directors,  or  by  a  resolu- 
tion of  the  stockholders. 

The  Board  of  Directors  shall  have  power  to  hold  its  meetings,  to 
have  one  or  more  oflSces,  and  to  keep  the  books  of  the  corporation 


236  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

(except  the  stock  and  transfer  books)  outside  of  the  State  of  New 
Jersey  at  such  places  as  may  be  from  time  to  time  designated  by  them. 

ARTICLE   V 

The  Company  shall  be  authorized  to  issue  capital  stock  to  the 
amount  of  dollars.     The  number  of  shares  of  which  the  capital 

stock  shall  consist  is  shares  of  the  par  value  of  dollars  each. 

(If  preferred  stock. is  desired,  insert  pro\isions  therefor  at  this  point.) 

ARTICLE   VI 

The  names  and  post-office  addresses  of  the  incorporators,  and  the 

number  of  shares  of  stock  for  which  severally  and  respectively  we 

do  hereby  subscribe,  the  aggregate  of  our  said  subscriptions  being 

dollars,  which  is  the  amount  of  capital  stock  with  which 

the  Company  will  begin  business,  are  as  follows: 

Names  Post-Office  Addresses  No.  of  Shares 

ARTICLE  vn 
The  duration  of  the  Company  shall  be  perpetual. 
In  Witness  Whereof,  we  have  hereunto  set  our  hands  and  seals 
this  day  of  191 

[L.S.] 

[L.S.] 

[L.S.] 

66.    A  CHARTER  "OBJECT  CLAUSE'" 

III.    The  objects  for  which  the  corporation  are  formed  are: 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber,  and 
other  material,  and  all  or  any  articles  consisting,  or  partly  consist- 
ing, of  iron,  steel,  copper,  wood,  or  other  materials,  and  all  or  any 
products  thereof. 

To  acquire,  own,  lease,  occupy,  use,  or  develop  any  lands  contain- 
ing coal  or  iron,  manganese,  stone,  or  other  ores,  or  oil,  and  any  wood 
lands,  or  other  lands  for  any  purpose  of  the  company. 

To  mine  or  otherwise  to  extract  or  remove  coal,  ores,  stone,  and 
other  minerals,  and  timber  from  any  lands  owned,  acquired,  leased, 
or  occupied  by  the  company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber,  and  other 
materials,  and  any  of  the  products  thereof,  and  any  articles  con- 
sisting or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines, 
cars,  and  other  equipment,  railroads,  docks,  slips,  elevators,  water- 

'  From  the  charter  of  the  United  States  Steel  Corporation. 


THE  ORGANIZATION  OF  INDUSTRY  237 

works,  gas  works,  and  electric  works,  viaducts,  aqueducts,  canals, 
and  other  water-ways,  and  other  means  of  transportation,  and  to 
sell  the  same  or  otherwise  to  dispose  thereof,  or  to  maintain  and 
operate  the  same  except  that  the  company  shall  not  maintain  or 
operate  any  railroad  or  canal  in  the  state  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease,  or  otherwise  to 
acquire,  and  to  hold,  use,  own,  operate,  and  introduce,  and  to  sell, 
assign,  or  otherwise  to  dispose  of,  any  trade-marks,  trade-names, 
patents,  inventions,  improvements,  and  processes  used  in  connection 
with  or  secured  under  letters  patent  of  the  United  States,  or  else- 
where or  otherwise,  and  to  use,  exercise,  develop,  grant  licenses  in 
respect  of,  or  otherwise  to  turn  to  account  any  such  trade-marks, 
patents,  licenses,  processes,  and  the  like,  or  any  such  property  or  rights. 

To  engage  in  any  other  manufacturing,  mining,  construction,  or 
transportation  business  of  any  kind  or  character  whatsoever,  and 
to  that  end  to  acquire,  hold,  own,  and  dispose  of  any  and  all  property, 
assets,  stocks,  bonds,  and  rights  of  any  and  every  kind,  but  not  to 
engage  in  any  business  hereunder  which  shall  require  the  exercise 
of  the  right  of  eminent  domain  within  the  state  of  New  Jersey. 

To  acquire  by  purchase,  subscription,  or  otherwise,  and  to  hold  or 
to  dispose  of  stocks,  bonds,  or  any  other  obligations  of  any  corpora- 
tion formed  for,  or  then  or  theretofore  engaged  in  or  pursuing,  any 
one  or  more  of  the  kinds  of  business,  purposes,  objects,  or  operations 
above  indicated,  or  owning  or  holding  any  property  of  any  kind  herein 
mentioned,  or  of  any  corporation  owning  or  holding  the  stocks  or 
the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell,  or  dispose  of, 
any  stock,  bonds,  or  other  obligations  of  any  such  other  corporation; 
to  aid  in  any  manner  any  corporation  whose  stock,  bonds,  or  other 
obligations  are  held  or  in  any  manner  guaranteed  by  the  company, 
and  to  do  any  other  acts  or  things  for  the  preservation,  protection, 
improvement,  or  enhancement  of  the  value  of  any  such  stock,  bonds, 
or  other  obligations,  or  to  do  any  acts  or  things  designed  for  any 
such  purpose;  and  while  owner  of  any  such  stock,  bonds,  or  other 
obligations,  to  exercise  all  the  rights,  powers,  and  privileges  of  owner- 
ship thereof,  and  to  exercise  any  and  all  voting  power  thereon. 

The  business  or  purpose  of  the  company  is  from  time  to  time  to 
do  any  one  or  more  of  the  acts  and  things  herein  set  forth;  and 
it  may  conduct  its  business  in  other  states,  and  in  territories,  and 
in  foreign  countries,  and  may  have  one  office,  or  more  than  one 
office,  and  keep  the  books  of  the  company  outside  of  the  state  of 


238 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


New  Jersey,  except  as  otherwise  may  be  provided  by  law;  and  may 
hold,  purchase,  mortgage,  and  convey  real  and  personal  property, 
either  in  or  out  of  the  state  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and  powers 
of  the  corporation,  it  is  hereby  expressly  declared  and  provided  that 
the  corporation  shall  have  power  to  issue  bonds  and  other  obliga- 
tions in  payment  for  property  purchased  or  acquired  by  it,  or  for 
any  other  object  in  or  about  its  business;  to  mortgage  or  pledge 
any  stocks,  bonds,  or  other  obligations,  or  any  property  which  may 
be  acquired  by  it,  to  secure  any  bonds  or  other  obligations  by  it 
issued  or  incurred;  to  guarantee  any  dividends,  or  bonds,  or  con- 
tracts, or  other  obligations;  to  make  and  perform  contracts  of  any 
kind  and  description  and  in  carrying  on  its  business  or  for  the  pur- 
pose of  attaining  or  furthering  any  of  its  objects,  to  do  any  and  all 
other  acts  and  things,  and  to  exercise  any  and  all  other  powers  which 
a  copartnership  or  natural  person  could  do  and  exercise,  and  which 
now  or  hereafter  may  be  authorized  by  law. 


67.    ACTS  OF  INCORPORATION  FOR  PRIVATE  BUSINESS 

PURPOSES  GRANTED  IN  THIS  COUNTRY 

BEFORE  THE  YEAR  1800' 


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Massachusetts 

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13 

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Connecticut 

3 

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4 
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18 
S 

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37 

New  York 

31 

New  Jersey 

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Pennsylvania 

3 
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3 
2 

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4 

10 

Delaware 

I 

Maryland 



3 

3 

3 

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4 
3 

3 

10 

3 

3 

II 

Virginia 

3 

30 

North  Carolina  .... 

4 

South  Carolina 

I 

3 

.... 

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Georgia 

0 

Vermont 

S 

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3 
I 

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13 

Kentucky 

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Tennessee 

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United  States 

3 

3 

Total 

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38 

36 

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31 

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38 

21 

32s 

Of  the  22s  corporations  shown  in  the  above  table  64  per  cent  were  created  in  New  England, 
states  next  in  order  being  New  York,  Virginia,  and  Pennsylvania.  Banks  and  insurance  companies 
make  up  24  per  cent  of  the  total  number. 

'  From  Simeon  E.  Baldwin,  "Private  Corporations,"  in  Two  Centuries'  Growth 
of  American  Law,  1701-1901,  p.  312.    Charles  Scribner's  Sons,  190a. 


THE  ORGANIZATION  OF  INDUSTRY 


239 


68.    THE  HOLDING  COMPANY » 

The  Atlantic  Coast  Line  Company  was  chartered  in  Connecticut 
m  1889  for  the  purpose  of  consolidating  under  one  ownership  the 
network  of  southern  railways  along  the  Atlantic  coast,  these  railways 

INTERCORPORATE  RELATIONSHIPS  OF  THE  ATLANTIC  COAST  LiNE   SySTEM 

[Size  of  rectangles  indicates  relative  amounts  of  capital  stock  outstanding. 
Cross-hatching  shows  percentage  of  capital  stock  owned  by  controlling  company.] 


ATLANTIC 
STOCK 

CDABT  LINE  CD. 
|1D,5[ID.DDD 

^^P 

T  LINE  R.R.CD. 

> 

r 

m 

^^^^^pDHVILLE  R.R.CD. 

fSDUTHERr 
RY.  CD. 


um 


"^SE 


GEORGIA  R.R. 


CHICAGD,  INDIA 


LE5BEE  DR 


GANIZATIDN 


EEDRSIA 


liDUIEiVILLE 
RY.  CD. 


R.R. 


being  amalgamated  in  1900  into  the  Atlantic  Coast  Line  Railroad 
Company.  The  Atlantic  Coast  Line  Company,  the  holding  company, 
on  June  30,  1906,  owned  (including  capital  stock  subscribed  for  but 

^From  Interstate  Commerce  Commission,  Special  Report  No.  i,  Intercorpo- 
rate Relatio}iships  of  Railways  in  the  United  States  as  of  June  jo,  igo6  (1908), 
pp.  23-25. 


240 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


not  fully  paid)  $25,266,300  out  of  $50,134,200  of  the  stock  of  the 
Atlantic  Coast  Line  Railroad  Company,  or  a  little  over  50  per  cent. 
It  also  owned  $11,500,000  of  the  bonds  of  the  same  company.    This 


stock  ownership  carried  with  it  equities  of  very  great  value.  This 
becomes  clear  when  we  observe  that  the  Atlantic  Coast  Line  Railroad 
owned  on  the  same  date   $30,600,000  out  of   $60,000,000  or  51 


THE  ORGANIZATION  OF  INDUSTRY  241 

per  cent  of  the  stock  of  the  Louisville  and  Nashville  Railroad 
Company.  This  latter  corporation  and  its  controlling  railway,  the 
Atlantic  Coast  Line  Railroad  Company,  were  the  lessees  of  the 
railway  properties  of  the  Georgia  Railroad  and  Banking  Company; 
and  the  Louisville  and  Nashville  Railroad  Company,  jointly  with  the 
Southern  Railway  Company,  owned  88  per  cent  of  the  stock  of  the 
Chicago,  Indianapolis,  and  Louisville  Railway  Company.  The  capital 
stock  of  the  Atlantic  Coast  Line  Company  was  reduced  in  May,  1897, 
from  $10,000,000  to  $5,000,000  by  the  issue  of  certificates  of  indebted- 
ness in  Ueu  of  the  shares  retired.  In  1898  the  stock  was  again  restored 
to  the  original  amount  of  $10,000,000  by  a  stock  dividend  of  100  per 
cent,  representing  the  accumulated  profits.  The  company  had  out- 
standing on  June  30,  1906,  $10,500,000  of  stock  (excluding  $2,100,000 
of  stock  subscribed  for  but  not  fully  paid)  and  $13,000,000  of  certifi- 
cates of  indebtedness.  It  therefore  appears  that  an  ownership  of 
shghtly  over  $5,000,000  of  capital  stock  in  this  holding  company 
controlled  solely  and  jointly  through  ownership  and  lease  a  railway 
system  of  over  11,000  miles  in  extent,  with  a  capitalization  of  over 
$725,000,000.' 

69.    A  CLASSIFICATION  OF  BONDS' 

A  comprehensive  basis  for  the  classification  of  bonds  is  not  to 
be  found  in  the  bond  lists  nor  in  current  market  reports.  The  names 
and  classes  thus  arranged  are  for  purposes  of  convenient  reference 
and  usually  follow  the  practice  of  the  local  exchange.  Generally 
speaking,  bonds  receive  their  titles  from  one  or  more  of  the  fol- 
lowing characteristics:  (i)  The  character  of  the  corporation  using 
them;  (2)  the  purpose  of  issue;  (3)  the  nature  of  security  given 
for  payment;  (4)  the  terms  of  payment,  and  (5)  e\idence  of  owner- 
ship and  transfer.  The  first  of  these  five  characteristics  is  used  as 
a  basis  for  general  classification.  That  is  to  say,  quotations  are 
usually  arranged  under  the  following  heads: 

Government — state  and  national. 
Municipal  and  county. 
Railroad,  express,  and  steamship  companies. 
Traction  companies. 

'[See  also  Selection  90:  "  Companies  Whose  Stocks  Were  Acquired  by  the 
United  States  Steel  Corporation." — Editors.] 

'  Adapted  from  F.  A.  Cleveland,  "  Classification  and  Description  of  Bonds," 
in  Annals  of  the  American  Academy  of  Political  and  Social  Science,  XXX,4oo-  411, 


342  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Gas,  electric  light,  and  water  companies. 

Bank  and  trust  companies. 

Investment  companies. 

Industrials. 

Mining  companies. 

Miscellaneous. 

CLASSIFICATION   ACCORDING   TO   PURPOSE   OF   ISSUE 

Among  the  many  varieties  of  bonds  which  take  their  names  from 
the  purpose  of  issue  the  following  may  be  noted: 

Adjustment  bonds,  bridge  bonds,  construction  bonds,  consoli- 
dated bonds,  car  trust  bonds,  dock  and  wharf  bonds,  equipment 
bonds,  extension  bonds,  founders'  bonds,  ferry  bonds,  general  bonds, 
improvements  bonds,  interim  bonds,  interest  bonds,  purchase  money 
bonds,  refunding  bonds,  reorganization  bonds,  revenue  bonds,  sub- 
sidy bonds,  terminal  bonds,  tunnel  bonds,  temporary  bonds,  unified 
bonds. 

CLASSIFICATION  OF  BONDS  ACCORDING  TO  THE  CHARACTER  OF  SECURITY 

PROVIDED   FOR  PAYMENT 

From  the  point  of  view  of  the  security  given  for  payment,  bonds 
fall  into  two  general  classes,  viz.,  (i)  unsecured,  and  (2)  secured. 
The  secured  bonds  may  again  be  divided  into  two  general  classes  (a) 
those  having  personal  security  and  (b)  those  secured  by  liens  on 
specific  property.    These  in  turn  may  be  subdivided  as  follows: 

1.  Unsecured. 

a)  Government  bonds. 

b)  Corporate  debentures. 

II.  Secured. 

a)  Personal  security. 

1.  Indorsed  bonds. 

2.  Guaranteed  bonds. 

a)  Guaranteed  as  to  principal. 

b)  Guaranteed  aa  to  interest. 

c)  Guaranteed  as  to  both  principal  and  interest. 

b)  Lien  security. 

I.   By  character  of  property  pledged. 
a)  Real  property. 

1.  Land  grant  bonds. 

2.  Real  estate  bonds. 


THE  ORGANIZATION  OF  INDUSTRY  243 

b)  Personal  property. 

1.  Collateral  trust  bond. 

2.  Sinking  fund  bonds. 

2.  By  the  character  or  priority  of  lien. 

a)  First,  second,  or  third  mortgage  bonds. 

b)  General  mortgage  bonds. 

c)  Blanket  mortgage  bonds. 

d)  Consolidated  mortgage  bonds. 

e)  Income  bonds. 

/)  Profit-sharing  bonds. 
g)  Dividend  bonds. 

3.  By  the  character  of  the  holding  participation  receipts. 

BONDS  CLASSLFIED  ACCORDING  TO  EVIDENCE  OF  OWNERSHIP  AND 

TRAtfSFER 

Considered  from  this  viewpoint  there  are  three  classes,  viz., 
coupon  bonds,  registered  bonds,  and  coupon  registered  bonds. 

Coupon  bonds  are  issues  the  contracts  for  payment  of  interest  on 
which  are  evidenced  by  separate  coupons  or  contracts  for  payment, 
which  fall  due  consecutively  on  the  interest-paying  dates.  The 
coupons  may  be  detached  and  constitute  complete  promissory  notes 
in  themselves,  payable  to  bearer.  The  coupons  are  usually  written 
on  small  sections  of  a  sheet  of  paper  attached  to  the  principal  obliga- 
tion and  as  they  mature  are  clipped  off  and  presented  for  payment. 
They  are  frequently  presented  for  payment  through  a  bank  as  a 
check  or  draft  would  be. 

Registered  bonds  are  credit  instruments  the  interest  obUgation 
in  which  is  expressed  in  the  same  writing  or  paper  as  in  a  promissory 
note,  the  ownership  of  the  bond  being  registered  as  a  means  of  pro- 
tecting the  payee  against  loss,  necessitating  a  formal  transfer  and 
registration  to  transfer  the  title  when  the  old  instnmient  is  canceled* 
and  a  new  one  issued.  Interest  is  payable  by  money  deUvery  or 
by  check  sent  by  mail  to  the  address  of  the  registered  holder.  Notice 
should  be  given  of  any  change  in  address. 

Registered  coupon  bonds  are  issues  the  principal  of  which  is  regis- 
tered, the  coupons  being  made  payable  to  bearer. 

In  practice  a  single  bond  issue  may  have  any  number  of  these 
many  distinguishing  characteristics,  so  long  as  they  are  not  in  con- 
flict. When  applied  to  specific  issues  the  number  of  classes  may 
be  equal  to  the  mathematical  possibility  of  the  several  elements 


244  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

described  in  combination.  The  advantage  of  the  analytical  classi- 
fication here  used  is  that  by  classifying  and  defining  bond  character- 
istics the  terminology  may  be  understood  in  any  combination  used. 

70.    EXAMPLES  OF  TYPICAL  INVESTMENT  SECURITIES 

On  the  following  pages  are  printed  examples  illustrating  typical 
forms  of  bonds  and  of  stock  certificates.'  The  reproductions  are  in 
no  cases  facsimiles.  They  do,  however,  repeat  the  wording  of  the 
original  documents. 

» The  examples  of  bonds  are  taken  from  W.  G.  Sumner,  Specimens  of  Investment 
Securities.  E.  P.  Judd  Co.,  1901.  The  forms  of  stock  certificates  are  taken  from 
actual  certificates. 


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252  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

71.    THE  BASIS  OF  CAPITALIZATION* 

I.      ORIGINAL   INVESTMENT 

The  popular  theory  on  this  subject  is  that  capitalization  should  be 
based  on  the  original  cost  of  the  property  or  the  actual  investment  of 
capital  in  the  enterprise.  The  stocks  and  bonds  should  represent 
money  paid  in.  It  is  contended  that  investors  are  entitled  to  fair 
returns  upon  this  amount,  but  to  nothing  more. 

The  proposition  that  capital  be  limited  to  the  real  investment 
seems,  on  first  examination,  to  be  a  fair  one,  but  further  reflection 
will  show  that  there  are  certain  objections  to  such  a  rule.  In  some 
cases  the  actual  amount  invested  in  the  enterprise  would  give  too  high 
and  in  other  cases  too  low  a  capitalization.  This  basis  would  give 
too  high  a  capitalization  in  cases  where  the  original  cost,  on  account  of 
high  price  of  labor,  high  rate  of  interest,  incompetence  of  manage- 
ment, or  other  causes  had  been  much  greater  than  would  be  the  present 
cost  of  building  the  road.  Another  factor  has  been  cogently  stated  in 
a  recent  case — 

The  state  can  not  permit  the  capitalization  of  dishonesty,  extravagance, 
or  incompetence,  nor  can  it  permit  the  burden  of  obsolete  industrial  pro- 
cesses or  administration  to  be  laid  on  future  generations. 

It  is  unquestionable  that  in  the  case  of  many  Western  roads  capital 
was  recklessly  squandered  in  the  process  of  construction.  The  basis 
of  original  cost  would  give  too  low  a  capitalization  in  the  case  of  roads 
which  have  been  compelled,  in  the  interest  of  unity  and  efficiency  of 
service,  to  make  heavy  expenditures  for  the  purchase  of  competing  or 
contributing  systems.  The  public  has  no  legitimate  claim  to  all 
gains  resulting  from  economy  in  the  refunding  of  indebtedness  and 
in  the  operation  of  roads.  It  seems  not  unreasonable  that  skillful 
management  should  be  capitalized  to  some  extent. 

II.      EARNING   CAPACITY 

The  preference  of  railroad  financiers  for  earning  capacity  as  a 
basis  of  railroad  capitalization  is  easily  understood.  Capitalization 
on  this  basis  enables  a  road  to  conceal  the  extent  of  its  profits  and  to 
absorb  increasing  revenue  without  incurring  public  displeasure  and 
arousing  agitation  for  lower  rates.  Furthermore,  a  company  that  is 
highly  capitalized  can  usually  be  sold  to  better  advantage  than  one 

•  Adapted  from  the  Final  Report  (Vol.  XIX)  of  the  Industrial  Commission 
(1903),  pp.  408-15 


THE  ORGANIZATION  OF  INDUSTRY  453 

with  a  low  capitalization.  As  has  been  observed,  people  seem  to  like 
to  deal  in  large  figures,  and  the  average  investor  prefers  to  buy  200 
shares  of  stock  quoted  at  50  and  paying,  say,  3  per  cent,  than  100 
shares  of  stock  quoted  at  par  and  paying  6  per  cent.  A  large  capitali- 
zation, therefore,  is  thought  to  confer  some  advantage  for  purposes 
of  sale. 

There  are  two  legitimate  arguments  which  may  be  advanced  in 
favor  of  capitalization  on  the  basis  of  earning  capacity.  One  is  that — 
in  no  other  way  can  the  risks  incident  to  the  novel  enterprise,  repelling 
timid  capital,  be  overweighted  by  possible  profits  through  premiums  in 
the  form  of  securities  purchasable  at  discount. 

This  argument  does  not  hold,  however,  in  the  case  of  railroad 
undertakings  that  involve  no  real  initial  risk ;  and  it  is  probably  true 
that  the  element  of  risk  in  most  railroad  enterprises  projected  in  recent 
years  is  very  inconsiderable.  The  second  argument  is  more  weighty. 
It  is  contended  that  a  quick  capital,  in  the  form  of  credit  or  cash,  is 
needed  for  the  profitable  operation  of  any  plant.     As  stated — 

Without  such  working  capital  the  plant,  not  being  a  "going"  concern, 
loses  much  of  its  value.  Consequently,  it  is  urged,  capital  in  excess  of  the 
value  of  the  plant  may  rightfully  be  created  for  this  purpose  by  the  sale  of 
ttocks  or  bonds. 

The  force  of  this  argument  is  considerably  qualified  by  the  con- 
sideration that  a  railroad  corporation  possesses  a  valuable  franchise, 
attachable  for  debt,  which  seems  to  give  sufficient  security  to  enable 
it  to  obtain  working  capital  by  the  ordinary  means. 

The  chief  objection  to  capitalization  on  the  basis  of  earning 
capacity  is  that  it  obscures  the  relation  between  rates,  wages,  and 
profits.  It  is  impossible  to  discover,  without  a  careful  appraisal  of  the 
property,  whether  an  overcapitalized  road  is  earning  more  than  a  fair 
return  upon  the  investment.  The  principle  is  generally  accepted  at  the 
present  time  that  capital  is  not  entitled  to  more  than  a  certain  fair 
rate  of  profits.  The  issuance  of  additional  securities  on  the  basis  of 
increasing  earning  power  makes  it  possible  for  a  company  covertly  to 
secure  exorbitant  returns  on  the  actual  investment.  This  objection 
seems  conclusive  against  the  policy  of  full  capitalization  up  to  the 
limit  of  earning  power. 

in.      COST   OF   REPRODUCTION 

Neither  original  cost  nor  earning  power,  then,  furnishes  an  entirely 
satisfactory  basis  of  capitalization.     As  a  substitute,  cost  of  repro- 


2  54  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

duction  has  been  suggested,  and  in  some  cases  applied.  By  this  ia 
meant  simply  the  actual  cost  of  laying  down  the  roads  at  the  present 
time,  including  proper  allowance  for  value  of  terminals  and  right  of 
way.  Whether  the  present  capitalization  of  American  railroads  is 
in  excess  of  the  probable  cost  of  reproduction  is  disputed.  By  some 
it  is  asserted  that  railroad  capital  is  much  greater  than  the  cost  of 
constructing  the  roads  at  the  present  time.  By  others  it  is  declared 
to  be  actually  less. 

IV.      COMBINATION   OF   FACTORS   IN   CAPITALIZATION 

It  would  seem  that  a  fair  basis  of  capitalization  is  to  be  found  only 
by  taking  into  consideration  both  cost  of  reproduction  and  earning 
capacity.  The  United  States  Supreme  Court,  in  the  case  of  Smythe 
vs.  Ames  has  decided  that  the  following  items  should  be  considered 
in  estimating  the  value  of  railroad  property:  The  original  cost  of 
construction,  the  amount  expended  in  permanent  improvements,  the 
amount  and  market  value  of  its  bonds  and  stock,  the  present  as  com- 
pared with  the  original  cost  of  construction,  the  probable  earning 
capacity  of  the  property  under  particular  rates  prescribed  by  statute, 
and  the  sum  required  to  meet  operating  expenses.  The  Nebraska 
Maximum  Freight  Rate  Case  also  bears  directly  upon  this  issue. 

A  valuation  of  railroad  property,  with  regard  to  both  cost  of 
reproduction  and  earning  capacity,  was  undertaken  recently  by  the 
Board  of  Tax  Commissioners  of  Michigan.  The  commission  under- 
took, first,  to  appraise  the  physical  properties  of  the  roads,  and, 
second,  to  appraise  what  might  be  termed  the  nonphysical  elements 
in  their  value.  In  appraising  the  physical  properties  the  cost  of 
reproduction  was  taken  as  a  basis.  This  was  determined  by  a  thorough 
survey  of  the  roads,  made  by  experts.  The  nonphysical  elements  of 
railroad  property,  which  constitute  what  is  usually  called  the  franchise 
value  of  railway  corporations,  were  valued  according  to  a  plan  devised 
by  Professor  Henry  C.  Adams.  This  value  was  determined  (i)  by 
deducting  aggregate  expenses  of  operation  from  gross  earnings  an<£ 
adding  the  income  from  corporate  investments;  (2)  by  deducting  from 
the  total  income  thus  obtained  an  amount  properly  chargeable  to 
capital — that  is,  a  certain  per  cent  on  the  appraised  value  of  the 
physical  properties — rents  paid  for  the  lease  of  property  operated  and 
permanent  improvements  charged  directly  to  income;  (3)  by  capitaliz- 
ing the  remainder  at  a  certain  rate  of  interest.  Exceptions  from  this 
procedure  were  made  in  the  case  of  particular  roads  peculiarly  situ- 


(■  THE  ORGANIZATION  OF  INDUSTRY  255 

ated.  This  method  of  valuation  would  seem  to  give  the  true  basis  of 
capitalization,  which  would  then  represent  both  the  cost  of  repro- 
ducing the  property  and  the  franchise  value  arising  from  surplus 
earning  capacity.  Such  a  valuation  of  railroad  property  is  useful 
for  purposes  both  of  taxation  and  of  rate  making. 

The  relation  of  capitalization  to  rates  is  a  much-debated  question. 
Opinions  differ  as  to  whether  overcapitalization  results  in  an  increase 
of  freight  and  passenger  charges.  Hon.  Martin  A.  Knapp,  Chairman 
of  the  Interstate  Commerce  Commission,  testified  before  the  Indus- 
trial Commission  that  he  had  not  seen  an  instance  in  which  rates 
seemed  much  to  depend  upon  or  be  influenced  by  the  capitalization  of 
the  road.  Capitalization,  he  held,  cuts  no  figure  in  the  rate  question. 
He  admitted,  however,  that  when  the  reasonableness  of  a  particular 
rate  was  called  into  question,  capitalization  had  to  be  considered  in 
determining  what  the  road  in  question  ought  to  charge.  In  deciding 
upon  the  reasonableness  or  unreasonableness  of  a  road's  charges  the 
Interstate  Commerce  Commission  takes  into  consideration  its 
financial  condition.  If  a  road  is  embarrassed  with  fixed  charges  of 
large  amount,  a  rate  may  be  justifiable  which  would  be  altogether 
unreasonable  in  the  case  of  a  road  with  only  slight  incumbrances 
of  indebtedness. 

Mr.  T.  L.  Woodlock,  a  witness  before  the  Industrial  Commission, 
also  maintains  that  rates  are  not  affected  by  overcapitalization. 
Capitalization,  he  declares,  has  no  bearing  whatever  on  rates  or 
earnings.  It  is  a  resultant  of  forces,  and  not  a  force  itself.  Similarly, 
Mr.  H.  T.  Newcomb,  then  chief  of  the  Division  of  Statistics  of  the 
United  States  Department  of  Agriculture,  is  of  the  opinion  that  stock 
watering  has  no  material  bearing  on  rates.  In  support  of  this  opinion 
the  general  fact  of  the  heavy  decline  in  railroad  rates  since  1870  is 
cited.  Mention  is  also  made  of  particular  roads  which  have  increased 
their  capitalization  and  at  the  same  time  reduced  rates.  The  New 
York  Central  has  increased  its  capitalization  since  1892  from  $202,000 
to  $348,000  per  mile,  yet  rates  have  steadily  decUned.  On  the  other 
hand,  the  Southern  Pacific  has  a  remarkably  low  capitalization  of 
only  $18,000  per  mile,  yet  its  rates  are  so  high  as  to  arouse  public 
antagonism. 

It  may  be  conceded  upon  this  point  that  fixed  charges  and  divi- 
dends do  not  directly  affect  rates.  The  main  consideration  in  the 
adjustment  of  railroad  charges  is  the  development  of  trafl&c.  The 
cost  of  service  enters  in  only  so  far  as  the  actual  expense  of  hauling 


2S6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

goods  constitutes  a  minimum  below  which  rates  are  not  reduced. 
Above  this  minimum,  rates  are  determined  by  the  possibility  of 
developing  traffic. 

But  indirectly  capital  does  have  some  connection  with  rates. 
In  the  long  run  excessive  capitalization  tends  to  keep  rates  high; 
conservative  capitalization  tends  to  make  rates  low.  Rates,  as  we 
have  seen,  are  governed  by  "what  the  traffic  will  bear."  An  impor- 
tant element  in  determining  what  the  traffic  will  bear  is  the  pressure 
of  competition,  where  this  exists.  Two  kinds  of  competition  are  to  be 
distinguished  here,  which  have  been  termed,  respectively,  direct  and 
indirect  competition.  Direct  competition  is  that  between  lines  cover- 
ing the  same  territory  or  connecting  the  same  terminals;  indirect 
competition  takes  place  between  roads  having  no  territory  in  com- 
mon but  serving  producers  who  are  competing  for  the  supply  of  the 
same  markets. 

Our  wheat  roads  must  compete  not  only  with  those  in  Canada, 
but  with  Indian,  Russian,  and  Argentine  railroads,  as  well  as  with 
enormous  maritime  agencies  all  over  the  world.  This  sort  of  indirect 
competition  in  the  distribution  of  products  puts  a  certain  check  upon 
rates,  even  where  direct  competition  is  entirely  absent.  Where 
competition  of  either  kind  exists,  rates  are  not  dominated  by  the 
amount  of  capitalization.  But  competition  in  either  form  is  not 
always  present.  Where  it  is  absent,  overcapitalization  with  high 
fixed  charges  and  dividend  requirements  may  lead  to  the  raising  of 
rates  above  the  amount  that  would  give  reasonable  returns  upon  the 
actual  investment. 

High  capitalization  tends,  moreover,  to  keep  up  rates  by  prevent- 
ing voluntary  concessions  which  might  otherwise  have  taken  place, 
A  company  paying  high  dividends  may  find  it  expedient  to  lower  its 
rates  in  order  that  the  appearance  of  exorbitant  profits  may  not 
excite  a  hostile  public  opinion.  But  if  returns  from  excessive  rates 
can  be  distributed  in  dividends  on  watered  capital,  the  public  is  not 
aroused  to  demand  reductions.  High  capitalization,  therefore,  has 
at  least  an  indirect  bearing  on  rates.  The  amount  of  railroad  capital 
is  not  to  be  regarded  as  a  matter  of  no  concern  to  shippers. 


THE  ORGANIZATION  OF  INDUSTRY  257 

72.    METHODS  OF  STOCK  WATERING' 

Methods  of  inflating  capitalization  are  various.  Formerly  sheer 
fraud  was  often  practiced  in  issuing  stock  for  speculative  purposes. 
Between  1868  and  1872,  for  example,  the  share  capital  of  the  Erie 
Road  was  increased  from  $17,000,000  to  $78,000,000  for  the  purpose 
of  manipulating  the  market.  This  action  led  the  Board  of  the  New 
York  Stock  Exchange  in  1869  to  refuse  to  quote  the  Erie  shares. 
Another  fraudulent  device  consisted  in  paying  excessive  sums  to 
dummy  construction  companies,  composed  of  members  of  the  railroad 
company  and  their  friends.  For  instance,  the  original  Southern  Pa- 
cific road  cost  actually  only  $6,500,000;  although  it  is  a  matter  of 
record  that  $15,000,000  was  paid  a  construction  company,  and  the 
bankers'  syndicate,  which  financed  the  road,  received  $40,000,000 
in  securities,  or  an  average  of  $6  in  bonds  and  stock  for  each  dollar 
of  actual  cost.  The  same  thing  happened  in  connection  with  other 
Pacific  roads.  It  was  also  not  uncommon  for  directors  of  railroad 
companies  to  purchase  other  railroad  properties,  and  then  sell  them 
to  their  own  company  at  excessive  prices.  Again,  stock  has  in  many 
instances  been  given  away  by  railroad  companies  simply  as  a  bonus 
to  bait  purchasers  of  the  bonds  which  the  concerns  were  trying  to  float. 
It  is  well  known  that  the  New  York  Central,  Erie,  Reading,  St.  Paul, 
Chicago  and  Northwestern,  gave  away  in  this  manner  a  portion  of 
their  earlier  stock  issues.  These  flagrant  methods  of  stock  watering 
have  been  largely  discontinued  during  recent  years. 

The  principal  methods  of  stock  watering  still  employed  are  the 
following: 

1,  The  commonest  is  the  payment  of  so-called  stock  dividends  to 
shareholders.  "These  consist  either  of  an  outright  bonus  of  new 
shares  of  stocks  or  bonds,  or  in  a  mitigated  form,  of  stocks  sold  below 
par  or  at  less  than  market  quotations."  Examples  are  the  80  per 
cent  stock  dividend  of  the  New  York  Central,  in  1868;  the  Reading 
scrip  dividends  between  the  years  187 1  and  1876;  the  Chicago, 
Burlington  and  Quincy  and  Atchison  stock  dividends  of  20  per  cent 
and  50  per  cent,  respectively,  in  1880  and  1881 ;  and  the  famous  Boston 
and  Albany  distribution  of  state  stock  in  1882. 

2.  Consolidation  of  railroad  properties  offers  opportunities  to 
increase  capital  surreptitiously  in  various  ways,     (a)  One  is  through 

'From  the  Final  Report  (Vol.  XIX)  of  the  Industrial  Commission  (1902), 

w-  405-7- 


2S8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  issue  of  new  stock  to  defray  the  entire  expenses  of  betterment  of 
the  operating  plant,  (b)  Sometimes,  again,  the  constituent  companies 
are  gerrymandered  so  that  the  successful  concerns  with  surplus  earn- 
ings are  combined  with  roads  less  favorably  situated,  thus  making 
it  possible  to  distribute  earnings  at  a  comparatively  low  di^^dend 
rate,  (c)  The  third  device  connected  with  consolidation  consists  in 
substituting  a  high-grade  for  a  low-grade  security.  A  weak  com- 
pany, whose  stock  is  quoted,  say,  at  50,  may  be  merged  in  a  second 
corporation  whose  stock  stands  at  100.  The  latter  may  then  issue 
new  stock  worth  $100  in  exchange  for  the  $50  stock,  share  for  share. 

3.  A  third  method  is  the  substitution  of  stock  issues  for  funded 
debt.  It  has  the  advantage  of  giving  great  elasticity  to  future 
dix-idend  possibilities.  The  substitution  of  8  per  cent  stock  for  4  per 
cent  bonds  facilitates  the  absorption  of  increasing  earnings  in  the 
future.  The  stocks  also  permit  of  cessation  of  dividends  during 
periods  of  depression.  The  substitution  of  stocks  for  bonds  in  this 
way  is  not,  however,  so  harmful  to  the  public  interest,  provided  the 
stock  issues  are  subject  to  control  by  state  commissions. 

4.  Another  expedient  for  increasing  capitalization  is  the  funding  of 
contingent  liabilities.  Large  amounts  of  such  liabilities,  in  the  form 
of  bills  payable,  wages  and  salaries  due,  and  the  like,  may  be  covered 
by  issues  of  interest-bearing  scrip.  This  is  unquestionably  bad 
financiering,  as  floating  debts  should,  in  general,  be  provided  for 
out  of  earnings. 


VII.  EXAMPLES  OF  MODERN  CAPITALISTIC 

ORGANIZATION 

i<\.    RAILROADS 

73.    TRANSPORTATION  COSTS  IN  THE  PIONEER  MIDDLE 

WEST' 

About  the  year  1805,  the  usual  price  of  carriage  over  the  country 
roads  was  stated  to  have  been  50  cents  for  100  pounds  for  every 
twenty  miles.  At  this  rate,  corn,  which  before  1835  rarely  sold  for 
as  much  as  35  cents  per  bushel,  would  not  stand  the  expense  of 
moving  twenty-five  miles,  even  though  it  had  been  produced  without 
cost.  On  the  same  basis,  the  area  in  which  wheat  could  be  sold  at 
a  profit  to  the  farmer  was  limited  to  a  radius  of  from  fifty  to  seventy- 
five  miles.  In  Kentucky,  the  most  populous  state  in  the  West  in 
1805,  "there  was  not  a  single  species  of  product,  with  the  exception 
of  ginseng,  that  would  bear  the  expense  of  carriage  by  land  from  that 
state  to  Philadelphia."  In  view  of  this  situation,  it  is  easy  to  see 
why  the  farmers  turned  their  corn  into  whiskey,  or  fed  it  to  hogs, 
driving-  the  animals  to  market,  rather  than  attempting  to  make  a 
profit  from  the  sale  of  the  grain.  The  same  condition  that  made  it 
unprofitable  for  the  farmer  to  ship  bulky  articles  like  grain,  made  it 
impossible  for  him  to  import  from  any  great  distance  tools  used  on 
the  farm,  including  heavy  agricultural  implements,  and  thus,  in  the 
absence  of  adequate  means  of  transportation,  the  burden  of  manu- 
facture fell  upon  the  small  mechanics,  chiefly  blacksmiths,  in  every 
locality — a  fact  which  explains  the  wide  dispersion  of  manufacturing 
industry  during  the  pioneer  days. 

Not  only  were  the  various  portions  of  the  West  in  a  large  measure 
isolated  from  each  other,  but  because  of  the  distance  down  river  by 
way  of  New  Orleans  and  the  ocean  to  the  sea-board  cities  of  the 
Atlantic,  and  on  account  of  the  bad  roads  over  the  Alleghany  Moun- 
tains, the  western  region  as  a  whole,  before  the  building  of  the  canals, 
was  shut  out  from  any  considerable  commercial  relation  with  the 
East.  These  difl&culties  are  reflected  in  the  freight  rates  prevailing 
between  the  East  and  West  during  the  pioneer  period.     In  1784  it 

'  Adapted  from  Isaac  Lippincott,  "  Pioneer  Industry  in  the  West,"  in  The 
Journal  oj Political  Economy,  XVIII,  270-72  (April,  1910). 

359 


36o 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


cost  $249  a  ton  to  bring  iron  from  Philadelphia  to  Presque  Isle  (Erie), 
Pennsylvania.  Salt,  a  very  necessary  article,  brought  over  the  moun- 
tains on  the  backs  of  animals,  sold  for  as  much  as  eight  and  ten 
dollars  a  bushel,  its  great  cost  making  the  quest  of  salt  springs  one 
of  the  ver>'  first  duties  of  the  western  pioneers.  Between  Pittsburg 
and  Wheeling  and  the  eastern  cities  the  freight  rate  for  years  ranged 
from  $5.00  to  $8.00  per  hundredweight.  To  the  more  distant 
points  in  the  Ohio  valley  the  rate  was,  of  course,  higher.  The  cost 
of  bringing  one  hundred  pounds  from  New  Orleans  to  Pittsburg 
by  fiatboat  or  barge  during  the  years  1786  to  i8ii  had  been  about 
$6.75  per  hundredweight.  In  1802  the  cost  of  carriage  from  Phila- 
delphia and  Baltimore  to  Lexington,  Kentucky,  ranged  from  $7.00 
to  $8 .  GO  per  hundred.  From  Baltimore  to  Zanesville,  Ohio,  the  rate 
was  $10.00  in  1818,  and  up  river  from  New  Orleans  to  Zanesville, 
via  Shippingport,  it  was  $6 .  50. 

74.    WIDENING  OF  THE  MARKET  THROUGH  IMPROVED 

TRANSPORTATION 

Assuming  wheat  to  be  worth  $1.00  a  bushel  and  corn  50  cents 
a  bushel  at  the  market,  and  that  there  are  t,;^  bushels  in  a  ton  of  each, 
the  following  indicates  the  value  of  a  ton  of  either  at  given  distances 
from  the  market  under  varying  methods  of  transportation.  It  is 
assumed  that  cost  of  transportation  over  the  ordinary  highway  of 


Wheat 


Transported  over 


Highway 


Early 
Railroad 


Modern 
Railroad 


Corn 


Transported  over 


Highway 


Early 
Railroad 


Modem 
Railroad 


Value  at  market .  .  . 
25  miles  distant. 
50  miles  distant. 

100  miles  distant. 

150  miles  distant. 

200  miles  distant. 

300  miles  distant. 

500  miles  distant. 
1 ,000  miles  distant. 
2,000  miles  distant. 
3,000  miles  distant. 
4,000  miles  distant. 
5,000  miles  distant. 
6,000  miles  distant. 
7,000  miles  distant. 


$33  00 
29.25 

25-50 

18.00 

10.50 

3.00 

o 


$33  00 
32.63 
32.25 
31  5° 
3075 
30.00 
28.50 

25  SO 

18.00 

3.00 

o 


$33  00 
32.88 

32.7s 

32.50 

32.25 

32.00 

31  SO 

30.50 

28.00 

23.00 

18.00 

13.00 

8.00 

3.00 

o 


^16.50 

12.75 
9.00 

I  SO 
o 


$16.50 
16.13 

IS-7S 
15.00 
14-25 
13 -SO 
12.00 
9.00 

I  SO 
o 


$16.50 
16.38 
16.25 
16.00 

IS-7S 
15-50 
15.00 
14.00 
II  .50 
6.50 

1-50 
o 


MODERN  CAPITALISTIC  ORGANIZATION  261 

about  1850  was  15  cents  per  ton  mile,  over  the  railroad  of  that  period 
i|  cents  per  ton  mile,  and  over  the  railroad  of  today  f  cent  per  ton 
mile.  While  the  actual  figures  used  are  only  approximations  they 
give  a  substantially  correct  conception  of  the  widening  of  the  market 
for  a  commodity  through  improved  means  of  transportation.  If, 
moreover,  we  deduct  from  the  values  here  indicated  the  farmer's  cost 
of  growing  the  grain,  it  will  be  better  appreciated  how  extremely 
limited  the  inland  markets  were  before  the  railroads  came  in. 

75.  THE  RELATION  OF  THE  TRANSPORTATION  CHARGE 

TO  PRICES' 

The  price  paid  by  the  housekeeper  per  dozen  for  eggs  during  the 
season  of  shipment  seldom  exceeds  by  more  than  five  cents  the  price 
received  by  the  western  farmer  who  takes  them  to  the  country  store. 
That  is,  the  railroads  bring  eggs  a  thousand  miles  to  New  York  for 
a  cent  or  a  cent  and  a  half  a  dozen,  and  two  thousand  miles  or  so  for 
about  two  cents  and  a  half  a  dozen,  the  dealers  taking  the  remainder 
of  the  five  cents  as  payment  for  handling.  The  net  difference  between 
the  price  paid  per  pound  for  butter  at  the  creamery,  whether  in 
New  York  City  or  in  the  Mississippi  Valley,  and  that  paid  by  the 
New  York  retail  dealer  averages  about  one  and  one-half  cents  for 
commission  and  one  cent  for  freight. 

In  December,  January,  and  February  turkeys  are  taken  from  the 
Texas  ranches  to  marketing  centers,  the  transportation  charge  on 
ten  birds  weighing  one  hundred  and  twenty  pounds  being  about  25 
cents.  After  these  ten  birds  have  been  dressed  and  packed  they 
weigh  about  one  himdred  and  two  pounds,  and  the  freight  rate  from 
Texas  to  New  York  is  $1.50  for  100  pounds.  That  is,  a  Texas 
turkey  that  retails  in  the  New  York  market  for  20  cents  a  poimd  will 
have  paid  one  and  three-fourths  cents  per  pound  to  the  railroads  that 
took  it  from  the  ranch  to  the  concentration  point  and  thence  to  the 
market.  The  farmer  in  Texas  received  about  nine  cents  per  pound, 
lea\'ing  a  trifle  over  nine  cents  to  be  divided  between  the  packing- 
house, the  produce  merchant,  and  the  retail  dealer. 

The  rail  rate  from  Chicago  to  New  York  on  grain  and  grain 
products  for  domestic  consumption  has  been  about  17^  cents  per  100 
pounds;  that  is,  a  bushel  of  oats  or  com  or  wheat,  that  may  bring 
in  New  York  anywhere  from  40  cents  to  $1,  has  been  brought  from  the 

» Adapted  from  Logan  G.  McPherson,  Railway  Freight  Rates,  pp.  48-66. 
Henry  Holt  &  Co.,  1909. 


262  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

western  farm  for  from  eight  to  fifteen  cents.  Hay  that  has  yielded 
the  farmer  $i8  or  $19  a  ton  and  sells  in  New  York  at  about  $24  has 
paid  the  railroads  somewhere  from  $3  to  S5  per  ton,  according  to 
whether  it  came  from  the  meadows  of  the  Ohio  or  the  Mississippi 
valleys. 

On  potatoes  the  freight  rate  per  barrel  containing  about  two  and  a 
half  bushels  is  $1.05  from  Florida,  65  cents  from  South  Carolina, 
45  cents  from  North  Carolina,  30  cents  from  Virginia,  and  from  this 
1 2  cents  per  bushel  the  rate  scales  down  to  five  or  six  cents  per  bushel 
from  nearby  regions.  The  freight  rate  on  tomatoes  from  Florida  is 
25  cents  per  package  of  six  baskets,  from  Texas  15  cents  for  twelve 
quarts,  from  Mississippi  76  cents  per  100  pounds,  and  from  the  nearby 
farms  eight  cents  per  bushel  of  twenty-eight  quarts.  The  freight 
rate  on  cantaloups  to  New  York  ranges  from  less  than  a  cent  for  a 
melon  from  the  Carolinas  to  about  two  and  a  half  cents  for  that  from 
California.  Oranges  from  Florida  to  New  York  pay  the  railroads  from 
four  to  nine  cents  a  dozen,  and  those  from  California  six  to  twelve  cents 
a  dozen,  as  they  may  be  large  or  small.  A  three-pound  can  of  tomatoes 
from  Maryland  pays  the  railroad  about  one-half  cent  per  can. 

The  freight  rates  to  New  York  on  foodstuffs  have  been  selected  as 
typical  of  the  transportation  charges  applying  on  such  commodities 
in  the  main  channels  of  traflSc  from  the  West  to  the  East;  and,  in  so 
far  as  fruits  and  vegetables  are  concerned,  from  the  South  to  the 
East.  The  transportation  charge  per  consumer's  unit  on  these 
foodstuffs  is  a  trifle  less  to  Philadelphia  and  adjacent  Delaware  and 
New  Jersey;  another  fraction  lower  to  the  great  Pittsburgh  district, 
and  still  lower  to  the  cities  of  the  West  and  South  that  are  nearer 
the  places  of  production.  As  prices  of  food  products  fluctuate  within 
a  fairly  wide  range  and  freight  rates  also  fluctuate,  though  within 
but  a  very  narrow  range,  the  rates  and  prices  specified  in  the  fore- 
going, as  well  as  in  the  succeeding  paragraphs  of  this  chapter,  cannot 
be  considered  as  of  specific  application  at  any  given  time  in  the 
future.  They  were  exact  at  the  time  they  were  collated  and  will 
very  closely  approximate  accuracy  at  any  period. 

As  New  York  may  be  considered  representative  of  the  places  to 
which  edible  products  of  the  West  and  South  are  consigned,  so  also 
may  St.  Louis  be  considered  a  typical  center  of  reception  of  the 
manufactured  products  of  the  East.  The  information  given  in  the 
immediately  following  paragraphs  was  obtained  from  merchants  and 
manxifacturers  of  that  city. 


I 
MODERN  CAPITALISTIC  ORGANIZATION  263 

The  transportation  charge  on  the  material  entering  into  a  pair  of 
shoes  made  in  a  St.  Louis  factory  averages  one  and  one-quarter  cents. 
The  transportation  charge  required  to  place  that  pair  of  shoes  in  the 
hands  of  a  consumer  in  any  part  of  the  United  States  averages  between 
two  and  three  cents.  The  material  entering  into  an  ordinary  bed- 
stead, such  as  retails  in  St.  Louis  for  $8,  will  have  paid  the  railroad 
about  40  cents.  From  ten  pounds  of  nails  made  in  Pittsburgh  and 
retailed  in  St.  Louis  the  railroad  will  have  obtained  a  trifle  over  two 
cents,  and  from  ten  pounds  of  wire  two  and  one-half  cents.  An  axe 
made  in  the  Pittsburgh  district  that  retails  in  St.  Louis  for  $1  will 
have  paid  the  railroads  one  and  one-fourth  cents.  At  Kansas  City 
that  same  axe  will  have  paid  freight  of  a  fraction  over  four  cents,  and 
at  Denver,  where  the  retail  price  ^ill  have  advanced  to  $1 .30,  it  will 
have  paid  14  cents  freight.  A  padlock  retailing  in  St.  Louis  at 
50  cents  will  have  paid  the  railroads  a  little  more  than  one-half  cent; 
at  Kansas  City  it  will  have  paid  one  cent,  and  at  Denver,  where 
the  retail  price  advances  to  75  cents,  it  will  have  paid  two  cents 
to  the  railroads.  An  eighteen-gallon  galvanized  iron  tub  that  retails 
in  St.  Louis  at  80  cents  will  have  paid  the  railroad  from  place  of  manu- 
facture two  and  three-tenths  cents;  to  Kansas  City  the  freight  rate 
will  have  been  six  and  one-fourth  cents,  and  to  Denver  15  cents, 
but  here  the  retail  price  of  that  tub  is  $1.  A  stove  that  weighs 
two  himdred  pounds  and  retails  in  St.  Louis  for  $18  will,  in  carload  lots, 
pay  44  cents  to  Kansas  City  or  Omaha,  and  retail  there  for  $22; 
$1 .  48  to  Denver,  and  retail  there  for  $25 ;  $2 .  50  to  Seattle,  and  retail 
there  for  $30.  When  a  housewife  of  St.  Louis  buys  a  dozen  clothes- 
pins she  has  paid  the  railroad  five  ten  thousandths  of  a  cent.  If  she 
buys  a  washboard  at  50  cents  she  has  paid  the  railroad  forty-two 
one  hundredths  of  a  cent.  In  Denver  she  would  pay  for  that  wash- 
board 60  cents,  of  which  the  railroad  would  have  received  two  cents. 
The  higher  rates  and  prices  that  have  been  specified  as  applying  in 
Kansas  City  and  Denver  may  also  be  taken  as  applicable  to  cities 
in  the  interior  South  and  Southwest,  such  as  Oklahoma,  Fort  Worth, 
and  San  Antonio. 

In  response  to  inquiries  made  concerning  certain  staple  articles 
of  daily  and  general  use  in  various  of  the  smaller  cities  and  towns 
extending  from  Massachusetts  to  Georgia  and  Illinois,  and  from 
Michigan  to  Mississippi,  it  has  been  ascertained  that  throughout 
this  region  the  transportation  charge  on  such  articles  ranges  as 
follows:  On  a  man's  suit  of  clothes,  from  two  to  eight  cents;  oncaUcoes 


264  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  ginghams,  from  one-fiftieth  of  a  cent  to  one-fifth  of  a  cent  a  yard; 
the  freight  charge  paid  on  the  entire  apparel  of  a  fully  dressed  man 
or  woman  in  this  section  would  range  perhaps  from  six  or  seven  to 
16  or  18  cents.  The  rate  on  an  ordinary  dining-room  suite  consist- 
ing of  table,  sideboard,  six  chairs,  and  a  china  closet  would  average 
from  75  cents  to  $5,  on  a  parlor  suite  of  sofa  and  four  chairs  from 
50  cents  to  $4,  on  a  bedstead  and  its  equipment  from  75  cents 
to  $1 .  50,  in  each  case  from  the  factory  to  the  home.  The  lumber 
used  in  the  ordinary  eight-room  house  will  have  paid  the  railroads  from 
$35  to  $150,  and  the  brick  from  $6  or  $8  to  S50  or  $60,  as  the  kiln  may 
be  near  or  remote.  A  fifty-pound  sack  of  flour  from  the  mill,  even  at 
Minneapolis,  in  but  a  few  cases  has  paid  a  freight  rate  of  over  eight  or 
nine  cents  to  the  consumer.  Products  of  the  beef  or  the  hog  are  car- 
ried from  the  western  packing-houses  throughout  this  territory  at  rates 
that  vary  from  a  fifth  of  a  cent  to  not  exceeding  a  cent  per  pound. 

The  transportation  charge  on  a  pair  of  rubber  overshoes,  including 
the  rubber  from  South  America,  the  cotton  stock,  and  the  shipment  to 
the  western  markets,  averages  about  two  and  one-half  per  cent  of 
the  cost  of  those  markets.  That  is,  a  pair  of  rubber  overshoes  retail- 
ing for  75  cents  will  have  paid  for  transportation,  all  told,  less  than 
one  and  nine-tenths  cents. 

The  claim  of  the  railroads  that  the  rates  on  foodstuffs  are  not  high 
enough  to  enter  as  a  factor  in  fixing  the  selling  price  is  fully  substanti- 
ated by  the  statements  of  the  dealers  in  such  products.  That  is, 
the  conditions  are,  with  negligible  exceptions,  such  that  if  the  price 
obtainable  in  the  markets  be  suflftcient  to  encourage  the  growing  of 
livestock,  grains,  dairy  products,  fruits,  or  vegetables,  the  rate  of 
freight,  from  whatever  locality  to  whatever  market,  is  sufficiently 
low  to  allow  the  producer  to  enter  that  market.  His  profits  are, 
however,  as  a  matter  of  course,  diminished  by  the  amount  of  freight 
which  he  pays,  and,  as  a  rule,  the  farther  the  place  of  production  from 
the  markets  the  greater  is  the  freight  charge.  The  differences  in  the 
net  return  to  the  producer  are  almost  invariably  reflected  in  the  value 
of  the  land,  which  is  lower  as  the  distance  from  the  markets  is  greater. 
Largely  because  of  the  defective  system  of  mercantile  distribution  the 
grower  of  foodstuffs  obtains  a  smaller  proportion  of  the  price  paid  by 
the  consumer  than  accrues  to  the  grower  of  any  other  agricultural 
product. 

The  rates  on  raw  materials  are  so  adjusted  as  to  permit  the  manu- 
facture of  any  staple  article  at  any  logical  place  of  manufacture.     On 


MODERN  CAPITALISTIC  ORGANIZATION  265 

the  raw  material  of  wearing  apparel  the  freight  rate  is  entirely  unim- 
portant. On  the  lumber  that  enters  into  building  material,  on  the 
ore,  coke,  and  limestone  used  in  the  manufacture  of  iron  and  steel 
the  freight  rate  is  sufficient  to  become  an  appreciable  factor  in  the  cost 
of  manufacture.  On  brick,  coal,  and  cement  the  selling  price  is  the 
higher  by  the  amoimt  of  the  freight  charge,  which  for  distances  some- 
times not  considerable  exceeds  the  value  of  the  commodity  at  the 
place  of  production.  The  freight  charge,  even  on  those  heavier 
commodities,  however,  is  far  less  in  proportion  to  the  wage  of  the 
day  laborer  as  well  as  to  the  incomes  and  salaries  received  in  the 
United  States  than  in  any  other  coimtry. 

Specific  complaint  in  regard  to  the  freight  rates  of  the  United  States 
for  many  years  has  not,  except  in  a  small  minority  of  cases,  been  based 
on  the  ground  that  they  have  prevented  foodstuffs  from  finding  a 
market,  raw  material  from  reaching  places  of  manufacture,  or  finished 
products  from  distribution.  While  the  difference  of  a  cent  or  two 
in  the  rate  of  freight  may  not  in  the  least  interfere  with  the  conduct 
of  industry  or  commerce  in  the  aggregate,  such  a  slight  difference  may 
perhaps  determine  whether  a  manufacturer  obtain  his  raw  material 
from  this  or  that  source  of  supply,  whether  a  wholesale  dealer  obtain 
his  stock  from  the  manufacturer  in  one,  or  the  manufacturer  in  another 
city,  whether  a  retail  dealer  make  his  purchases  from  the  wholesale 
dealer  in  this  city  or  in  that  city.  That  is,  for  example,  the  prices  of 
the  products  at  the  sources  of  supply  being  equal,  a  difference  in  the 
rate  of  freight  may  determine  whether  Cleveland,  Ohio,  obtain 
potatoes  from  Michigan  or  from  upper  New  York;  whether  a  factory 
in  Louisville  obtain  coal  from  the  fields  of  southern  Indiana  or  central 
Kentucky.  A  carpenter  in  Des  Moines  may  perhaps  pay  a  dollar 
for  twenty  poimds  of  nails  without  knowing  or  caring  what  the  freight 
rate  may  have  been,  or  where  they  may  have  come  from.  A  differ- 
ence, however,  of  a  few  cents  a  hundred  pounds  in  the  rate  of  freight 
may  have  led  the  hardware  dealer  to  have  purchased  the  nails  in 
Chicago  or  St.  Louis  or  even  directly  from  Pittsburgh. 

As  the  purchase  of  raw  material  tends  toward  the  prosperity  of 
the  region  where  it  is  produced,  as  the  operation  of  a  factory  tends 
to  the  increase  of  population,  to  appreciation  in  the  value  of  real 
estate  and  the  augmentation  of  business  at  the  place  of  its  location,  so 
also  does  the  growth  of  a  wholesale  business  or  of  a  retail  business  aid 
in  the  development  of  its  surroundings.  Producers,  manufacturers, 
wholesalers,  and  retailers  naturally  all  desire  to  extend  their  sales. 


266  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  reach  further  markets  in  competition  with  their  rivals,  and  are 
supported  in  this  desire  by  the  communities  to  whose  welfare  they 
contribute.  Any  difTerence  in  freight  rates  that  gives  a  producer  of 
raw  material,  a  manufacturer,  a  wholesale  distributer,  or  a  retail 
merchant  an  advantage  over  a  competitor  of  another  locality  is 
therefore  promptly  made  the  subject  of  complaint. 

76.    COSTS  IN  RAILROAD  OPERATION' 

The  costs  of  railroad  transportation  may  be  div-ided  into  two 
classes:  (i)  the  direct,  or  variable  costs,  that  is  those  items  of  cost 
which  represent  the  extra  expenditure  to  which  a  rail  carrier  is  put 
by  the  transportation  of  any  particular  shipment,  e.g.,  extra  fuel  for 
power,  handling  of  the  freight,  etc.;  (2)  indirect  or  constant  costs,  in- 
cluding those  expenditures  which  do  not  vary  with  each  shipment  but 
which,  within  certain  limits,  remain  the  same  irrespective  of  the 
amount  of  traffic  carried,  e.g.,  taxes,  interest  on  bonds,  a  large  share 
of  the  cost  of  maintaining  roadbed,  etc.  While  no  sharp  line  can  be 
drawn  between  direct  and  indirect  costs,  it  is  necessary  to  examine 
in  the  rough,  the  relationship  existing  between  these  two  kinds  of 
cost. 

Railroad  expenditures,  aside  from  dividend  payments,  may  be 
divided  roughly  as  follows: 

1.  Maintenance  of  Way  and  Structures 15  per  cent 

2.  Maintenance  of  Equipment 14      " 

3.  Conducting  transportation 40 

4.  General  expense 3 

5.  Fixed  charges 28 


Total 100  per  cent 

The  expenditures  for  maintenance  of  way  and  structures  are 
made  up  of  several  items.  These  expenditures  vary,  partly  with  the 
amount  of  traffic  carried,  and  partly  from  other  influences.  Heavy 
hauling  wears  on  rails,  roadbed,  bridges  and  culverts,  but  half  loaded 
trains  wear  nearly  as  much  as  loaded  ones.  The  elements  of  nature 
cause  rails  to  rust,  ties  to  rot,  and  wash  out  roadbeds,  while  bridges 
and  culverts  both  rust  or  rot,  and  become  out  of  date.  Repairs 
and  renewals  of  fences,  road  crossings,  signs,  and  cattle  guards  are 
not  in  the  least  affected  by  the  amount  of  freight  hauled.     Stations 

'  Adapted  from  J.  F.  Strombeck,  Freight  Classification,  pp.  11-18,  32.  Hough- 
ton MiiBin  Co.,  191 2.  ' 


MODERN  CAPITALISTIC  ORGANIZATION  267 

do  not  wear  out,  but  on  account  of  wind  and  weather  need  repainting 
and  repairing.  Docks  and  wharves  are  affected  by  the  volume  of 
business,  and  also  by  the  elements.  All  wear  and  tear  from  the  action 
of  the  elements  goes  on  irrespective  of  the  amount  of  traflSc  carried. 
While  such  wear  and  tear  varies  according  to  climate,  soil,  rainfall, 
number  of  bridges,  etc.,  on  the  whole  it  may  be  said  that  of  the  total 
expenditures  required  for  maintenance  of  way  and  structures,  five- 
eighths  represent  constant  (indirect)  and  three-eighths  variable 
(direct)  expenses.  As  maintenance  of  way  and  structures  represents 
fifteen  per  cent  of  the  total  expenditures  aside  from  dividend  pay- 
ments, this  makes  9.37  per  cent  of  the  expenditures  constant  and  5 .  63 
per  cent  variable. 

Likewise  the  items  included  under  the  head  of  maintenance  of 
equipment  are  part  constant  and  part  variable.  Rolling  stock  gener- 
ally needs  repairs  because  worn  out.  These  repairs  vary  largely  with  the 
traffic.  Cars  are,  however,  worn  almost  as  much  by  carrying  a  half  as 
a  whole  load.  Engines  deteriorate  little  more  from  hauling  a  heavy 
load  than  from  a  light  one.  Locomotives  and  cars  are  replaced  by  new 
ones  quite  as  much  because  they  become  antiquated  and  out-of-date 
as  because  they  are  worn  out.  On  the  whole  it  is  probably  not  unfair 
to  apportion  expenditures  for  maintenance  of  equipment  equally 
between  constant  and  variable  expenses.  Maintenance  of  equip- 
ment payments  being  14  per  cent  of  the  total  payments  aside  from 
dividend  payments,  7  per  cent  may  be  called  constant  costs  and  7 
per  cent  variable. 

Taking  up  the  items  which  constitute  the  expenditures  for  con- 
ducting transportation,  it  is  found  that  station  expense,  cost  of  station 
service  and  suppUes,  switchmen,  flagmen  and  watchmen,  signalling, 
and  similar  items  are  practically  constant  costs.  Such  expenses  as 
wages  of  engineers  and  roundhouse  men,  cost  of  fuel  and  water,  train 
service  and  train  supplies,  and  items  of  similar  nature  are  variable, 
although  the  expense  for  a  full  train  does  not  differ  much  from  that 
for  an  empty  one. 

Roughly  speaking,  one  third  of  the  expense  of  conducting  trans- 
portation may  be  taken  as  constant.  These  expenditures  being  40 
per  cent  of  the  total  aside  from  dividend  payments  there  are  26.67 
per  cent  to  be  added  to  the  variable  and  13.33  per  cent  to  the 
constant  expenditures. 

The  items  of  general  expense  are  for  the  service  as  a  whole.  They 
are  only  slightly  affected  by  changes  in  traffic  and  should  be  con- 


268  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

sidered  as  constant.     The  several  items  included  under  fixed  charges 
are  also  constant.     These  two,  i.e.,  general  expenses  and  fixed  charges, 
amount  to  3  per  cent,  and  28  per  cent  respectively. 
Summarizing  the  above  gives  the  following: 

Indirect  Direct 

Expenditures  (aside  from  dividend  payments)  or  or 

Constant       Variable 

1.  Maintenance  of  way  and  structures 9.37        5 .  63 

2.  Maintenance  of  equipment 7 .  00         7 .  00 

3.  Conducting  transportalitm 13  33       26. 67 

4.  General  expense 3 .  00 

5.  Fixed  charges 28 .  00 

Total 60.  70      39 . 30 

Thus,  approximately  60  per  cent  of  the  expenditures  analyzed 
are  constant  and  40  per  cent  are  variable.  It  must  be  remembered 
that  these  expenditures  do  not  include  payments  for  dividends,  reserve 
funds,  etc.,  and  therefore  the  proportion  of  an  average  freight  rate, 
under  average  conditions,  that  goes  to  cover  variable  expenditures 
is  less  than  40  per  cent  of  the  total.  This  item  of  variable  e.xpendi- 
tures  represents  what  might  well  be  termed  a  minimum  rate  which 
must  be  charged  on  every  shipment  carried.  Other  traffic  will  not 
be  burdened  if  additional  freight  is  carried  at  this  minimum  rate. 
There  are,  however,  cases  in  which  the  rate  might  properly  be  even 
less  than  this  minimum. 

One  fundamental  principle,  having  almost  universal  application, 
can  be  laid  down,  namely,  every  freight  rate  must  be  at  least  sufficiently 
high  to  provide  an  amount  of  revenue  which  equals  the  direct  costs  of  trans- 
porting the  commodity  upon  which  it  applies. 

Granting  this  principle,  there  remains  the  question,  how  shall  the 
indirect  costs  of  a  railway,  and  this  item  includes  a  fair  return  on 
investment,  be  apportioned  upon  the  several  unit  shipments  that  are 
carried?  This  is  where  the  real  difiiculty  in  rate-making  begins. 
The  problems  connected  with  determining  the  minimum  rate  are 
largely  for  the  accountant  to  solve.  Those  relating  to  the  apportion- 
ment of  the  constant  expenditures  upon  the  unit  shipments  carried 
are  vastly  greater  and  of  an  entirely  different  nature,  involving  a 
consideration  of  all  the  industrial  and  social  interests  of  the  country. 
The  indirect  cost  may  be  apportioned  in  either  of  two  ways: 
(i)  each  unit  shipment  may  be  made  to  bear  a  portion  equal  to  that 
borne  by  each  and  every  other  unit,  or  (2)  the  amount  that  the 
various  units  shall  bear  may  be,  broadly  speaking,  in  proportion  to 
their  ability  to  pay.     The  former  method  is  impracticable  because 


MODERN  CAPITALISTIC  ORGANIZATION  269 

it  would  make  the  rate  on  some  cheap  commodities  so  high  that  they 
could  not  be  transported.  The  second  method  is  the  one  that  has 
been  adopted  in  order  to  secure  the  greatest  good  to  carriers,  ship- 
pers, and  society  in  general. 

It  is  possible  to  formulate  a  second  fundamental  principle  govern- 
ing classification  and  rates,  as  follows :  The  indirect  costs  of  transporta- 
tion may  be  apportioned  upon  the  units  of  traffic  in  unequal  proportions, 
taking  into  consideration  the  ability  of  each  particular  commodity  to 
pay,  but  in  so  doing,  no  undue  or  unreasonable  preference  or  advantage 
whatsoever  shall  be  given  to  any  particular  party,  commodity,  or  locality. 
This  is,  in  fact,  the  governing  principle  of  freight  classification. 

77.    ADDED  TRAFFIC  PAYS' 

The  reason  for  the  continued  and  rapid  building  of  branches  in 
spite  of  their  apparent  unproductiveness  is  simply  this:  They  con- 
tribute traffic  to  the  main  line  which,  as  it  is  merely  an  increment, 
costs  always  comparatively  little  to  move,  and  often  nothing  at  all. 
The  company,  therefore,  receives  from  its  contributed  traffic  rates 
for  a  haul  of  perhaps  500  miles  at  a  cost  for  hauling  due  to  only 
100  or  200  miles.  Rudely  speaking,  if  we  call  the  average  cost  per 
ton  or  passenger-mile  100,  we  may  say: 

Average  cost  per  unit  of  trafl&c  = 100 

Extra  passengers,  singly,  cost o-|- 

"  "  in  car-loads  cost 5  to  30 

"  "  in  train-loads  cost 50 

Extra  freight  in  small  lots  costs  often  in  both  directions  and 

usually  in  one  direction o-j- 

"  **     in  car-loads 5  to  20 

"  "  in  train-loads  (and  all  car-loads  must  ordinarily  be 
considered  to  be  made  up  into  extra  trains  in  the 
direction  of  heaviest  traffic)  not  over 60 

Not  unfrequently  when  a  large  part  of  the  traffic  of  a  branch 
goes  over  the  main  line  in  the  direction  of  favoring  grades  it  is  handled 
over  the  main  line  at  no  appreciable  extra  cost  by  simply  filling  up 
trains,  and  the  branch  is  then  enormously  profitable. 

78.    A  RESULT  OF  RAILROAD  COMPETITION' 

The  Empire  Transportation  Company,  which  was  the  organiza- 
tion which  transported  the  oil  over  our  lines,  had  engaged  in  the 
business  of  refining  oil;    the  Standard  Company  complained  to  the 

'  From  A.  M.  Wellington,  The  Economic  Theory  of  the  Location  of  Railways, 
pp.  732-33.    John  Wiley  &  Sons,  1891. 

*  From  testimony  of  A.  J.  Cassatt,  of  the  Pennsylvania  R.R.  Co.,  in  House 
Reports,  soth  Congress,  ist  session,  IX,  175-76. 


i7o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

officers  of  the  Pennsylvania  Railroad  Company  that  they  did  not 
get  fair  treatment  from  the  Em[)ire  Transportation  Company  in 
the  matter  of  the  distribution  of  cars  when  cars  were  scarce;  that 
they  did  not  believe  they  got  as  good  rates  as  the  Empire  Transporta- 
tion Company  did,  and  that  in  every  possible  way  the  Empire  Trans- 
portation Company,  they  believed,  favored  their  own  refineries  as 
against  theirs,  and  they  took  the  position  and  stated  that  they  would 
not  be  subject;  they  would  not  transport  their  oil  by  an  organiza- 
tion which  was  also  a  rival  of  theirs  in  the  refining  business.  We 
endeavored  to  try  to  get  those  difficulties  harmonized;  talked  of 
getting  the  Empire  Transportation  Company  to  lease  its  refineries 
to  the  Standard  Oil  Company  or  put  them  into  other  hands,  but  we 
did  not  succeed  in  doing  that  and  bringing  these  two  companies 
together  in  that,  and  it  resulted  in  a  complete  breach,  and  the  Stand- 
ard Oil  Company  took  their  business  off  our  road,  and  we  had  a  very 
severe  contest  from  the  time  they  did  so  until  the  17th  of  October. 
During  that  time  the  Empire  Transportation  Company  itself  did 
all  the  refining  it  could  in  competition  with  the  Standard,  and  all 
the  other  refineries  not  connected  with  the  Standard  Oil  Company 
we  induced  to  come  on  our  line  and  ship,  but  we  did  it  at  a  very 
great  loss  to  the  company.  We  paid  very  large  rebates;  in  fact, 
we  took  anything  we  could  get  for  transporting  their  oil;  in  some 
cases  we  paid  out  rebates  more  than  the  whole  freight.  I  recollect 
one  instance  where  we  carried  oil  to  New  York  for  Mr.   Ohlen,  or 

some  one  he  represented,  I  think,  at  8  cents  less  than  nothing 

I  do  not  say  any  large  quantities,  but  oil  was  carried  at  that  rate. 

79.    SOME  FORMS  OF  RAILROAD  DISCRIMINATION'- 

The  following  are  a  few  of  the  most  important  discriminations 
and  the  methods  by  which  they  were  obtained: 

(i)  For  about  ten  years  the  New  England  territory  has  been  in 
control  of  the  Standard  Oil  Company  by  reason  of  the  refusal  of  the 
New  York,  New  Haven,  and  Hartford  road  and  of  the  Boston  and 
Maine  road,  on  all  but  a  few  divisions,  to  prorate — i.e.,  to  join  in 
through  rates — on  oil  shipped  from  west  of  the  Hudson  River,  and 
by  means  of  the  adjustment  of  published  rates. 

The  Standard  is  entitled  to  the  advantage  of  its  water  shipping 
points  in  reaching  New  England,  but  that  advantage  was  greatly 
and  unfairly  increased  when  the  railroads,  by  refusing  to  prorate, 

'  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Transportation 
of  Petroleum  (1006).  dd.  xxii-xrv. 


MODERN  CAPITALISTIC  ORGANIZATION  271 

virtually  kept  independent  refiners  from  using  all-rail  routes.  The 
refusal  to  prorate  increased  the  rail  rates  from  the  West  from  8  to 
10  cents  per  hundred  pounds.  These  railroads  do  prorate  on  all 
other  commodities;  their  refusal  to  do  so  in  the  case  of  oil  amounted 
to  imposing  a  substantial  tax  on  all  consumers  in  the  region  they 
cover,  and  is  also  a  heavy  discrimination  against  the  smaller  refiners. 

(2)  The  Standard  Oil  Company  has  been  able  to  absolutely  con- 
trol for  many  years  the  sale  of  oil  in  the  northeastern  part  of  New 
York  and  in  a  portion  of  Vermont  by  means  of  secret  rates  from  its 
refineries  at  Olean  and  Rochester. 

The  Pennsylvania  Railroad  has  given  the  Standard  a  rate  of  9 
cents  a  barrel  from  Olean,  N.Y.,  to  Rochester,  while  the  independent 
refineries  situated  in  territory  adjacent  to  Olean  were  given  a  rate  of 
38  cents  a  barrel.  By  means  of  this  g-cent  rate,  in  combination  with 
a  rate  from  Rochester  to  Norwood,  N.Y.,  a  virtually  secret  and  very 
low  rate  from  Norwood,  N.Y.,  to  Burlington,  and  secret  local  rates 
therefrom,  the  Standard  has  been  able  to  supply  central  and  northern 
Vermont  with  oil  at  a  rate  of  from  15  to  21  cents  per  hundred  pounds, 
whereas  no  independent  refiner  could  reach  that  territory  from 
western  Pennsylvania  save  by  a  rate  varying  from  33  to  50  cents 
per  hundred  pounds. 

The  saving  to  the  Standard  during  1904  by  the  secret  rate  from 
Olean  to  Rochester  alone  was  $115,000.  This  and  other  less  impor- 
tant rates  from  Olean  were  unknown  to  the  independent  refiners,  and 
were  not  published  on  the  ground  that  they  were  wholly  State  rates; 
yet  in  fact  they  were  used  for  oil  consigned  to  points  beyond  the 
State  boundary  of  New  York.  Furthermore,  all  the  shipments  from 
Olean  on  these  secret  rates  were  blind-billed — i.e.,  the  rates  were 
not  shown  on  the  waybills. 

(3)  The  Standard  Oil  Company  has  maintained  absolute  con- 
trol of  almost  the  whole  section  of  the  country  south  of  the  Ohio 
River  and  east  of  the  Mississippi  by  means  of  secret  rates  and  open 
discriminations  in  rates  from  Whiting,  Ind. 

For  example,  the  published  tariff  rate  from  Whiting,  Ind.,  the 
great  western  refinery  of  the  Standard,  to  Birmingham,  Ala.,  was  44 
cents  per  hundred  pounds.  For  at  least  ten  years  the  Standard,  by 
means  of  a  secret  combination  of  rates  by  way  of  Grand  Junction, 
Tenn.,  over  the  lines  of  the  Chicago  and  Eastern  Illinois,  the  Illinois 
Central,  and  the  Southern  Railway,  has  shipped  oil  to  Birmingham 
for  29I  cents.  The  Toledo  competitor,  no  farther  distant,  had  to 
pay  47^  cents. 


272  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

A  great  area  in  the  South  has  been  reached  by  this  same  secret 
combination  at  rates  averaging  one-fourth  less  than  the  published 
rates.  The  total  saving  to  the  Standard  on  these  rates  has  been 
about  $70,000  per  year. 

Again,  the  open  rate  from  Whiting  to  Evansville,  Ind.,  has  been 
for  many  years  11  cents.  The  Standard  has  for  about  ten  years 
shipped  oil  to  Evansville,  for  local  use  and  for  many  points  beyond 
in  the  Southeast,  at  so-called  State  rates  of  6  cents  and  8j  cents. 
The  freight  paid  by  the  Standard  in  this  case  has  been  about  $10,000 
a  year  less  than  the  open  rate. 

The  rates  to  this  same  territory  from  the  independent  refining 
points  at  Toledo  and  Cleveland  were  from  8  to  28  cents  per  hundred 
pounds,  or  from  ^  to  i^  cents  a  gallon  higher  than  the  rate  paid  by 
the  Standard. 

The  records  of  the  Chicago  and  Eastern  Illinois  Railroad  Com- 
pany show  plainly  that  these  Grand  Junction  and  Evansville  rates 
were  intended  to  be  secret,  were  given  for  the  sole  benefit  of  the 
Standard,  and  were  handled  as  secret  rates  with  the  knowledge  of 
Standard  officials. 

(4)  The  Standard  Oil  Company  has  for  at  least  ten  years  shipped 
oil  from  Whiting  to  East  St.  Louis,  111.,  at  a  rate  of  6  or  6\  cents  on 
three  of  the  five  railroads  running  between  those  places,  while  the 
only  duly  published  rate  on  all  roads  has  been  18  cents  during  all  that 
period.  The  discrimination  saved  the  Standard  about  $240,000  in 
1904. 

For  many  years  East  St.  Louis  has  been  the  gateway  for  oil 
shipments  by  the  Standard  into  the  Southwest.  The  rates  from  the 
independent  refining  points  of  Ohio  to  East  St.  Louis  have  been 
about  12  cents  higher  than  the  rate  from  Whiting,  whereas  on  other 
commodities  of  similar  grade  these  points  pay  only  about  5  cents 
more  than  Whiting. 

Whiting  is  located  in  Indiana,  about  two  miles  from  the  Illinois 
line.  East  St.  Louis  is  in  Illinois,  just  across  the  river  from  St.  Louis. 
The  secret  low  rates  were  given  by  the  Chicago,  Burlington  and 
Quincy,  Chicago  and  Alton,  and  Chicago  and  Eastern  Illinois  railroads. 
They  were  not  published  on  the  ground  that  they  were  State  rates. 
In  dealing  with  these  rates,  one  of  the  roads — the  Chicago  and  Alton — 
falsely  waybilled  the  freight  at  18  cents,  and  collected  from  the  Stand- 
ard at  6  cents.  The  Chicago  and  Eastern  Illinois  blind-billed  its 
shipments.  The  Chicago,  Burlington  and  Quincy,  billed  and  collected 
at  the  6-cent  rate,  but  it  was  none  the  less  secret. 


MODERN  CAPITALISTIC  ORGANIZATION  273 

(5)  In  the  Kansas-Territory  field  there  are  some  unfair  open 
rates.  A  more  important  discrimination  has  been  in  the  arbitrary 
weights  fixed  by  the  railroads  on  crude  oil  and  fuel  oil.  This  dis- 
crimination prevents  the  Kansas  producer  from  selling  his  crude  oil, 
especially  that  of  low  gravity,  advantageously  in  competition  with 
the  fuel  oil  produced  by  the  Standard  and  the  small  local  refiners. 

Crude  oil  is  charged  on  the  basis  of  7.4  pounds  per  gallon;  its 
actual  weight  is  about  7 . 2  pounds.  Fuel  oil  produced  by  the  refineries 
is  charged  at  6.4  pounds;  it  actually  weighs  about  7.6  pounds. 
A  barrel  of  crude  oil  shipped  from  Kansas  to  St.  Louis  is  charged 
nearly  10  cents  more  than  a  barrel  of  fuel  oil;  this  difference  in  freight 
charges  is  equal  to  more  than  one-third  of  the  price  of  low-grade 
Kansas  crude. 

This  discrimination  has  existed  for  about  four  years.  It  does  not 
exist  in  any  other  field.  The  legislation  of  Kansas  in  1905  put  an 
end  to  it  so  far  as  shipments  within  the  State  are  concerned. 

(6)  In  California  direct  rebates,  as  well  as  discriminations  by  the 
use  of  secret  rates,  have  been  given  on  oil. 

These  rebates  and  discriminations  benefited  the  Standard  to  the 
extent  of  about  $100,000  in  1904.  The  Associated  Oil  Company, 
the  Union  Oil  Company,  and  some  consumers  of  oil  also  received 
rebates  and  secret  rates,  but  the  Standard  apparently  received  as 
much  as  all  other  interests  combined.  These  favors  were  almost 
invariably  denied  the  ordinary  shipper.  On  shipments  to  Arizona, 
rebates  on  state  rates  were  received  by  the  Standard  in  connection 
with  interstate  shipments;  this  virtually  was  a  rebate  on  interstate 
business.  Owing  to  the  fact  that  fuel  oil  is  extensively  sold  under 
contract  on  the  Pacific  coast  rate  discriminations  obtained  by  a  few 
favored  shippers  have  enabled  them  to  monopolize  markets  for  long 
periods. 

Great  injury  has  been  inflicted  by  railroads  upon  independent 
shippers  through  discriminations  in  the  distribution  of  tank  cars. 

(7)  Open  published  rates  from  Whiting  into  a  large  part  of  the 
United  States  have  given  the  Standard  Oil  Company  an  unfair 
advantage  of  from  i  to  20  cents  per  hundred  pounds. 

This  discrimination  seriously  limits  independent  refiners  in  some 
markets,  and  shuts  them  out  completely  from  other  markets.  It  is 
accomplished  by  the  use  of  commodity  rates — that  is,  rates  which 
apply  only  to  petroleum  and  its  products — and  by  refusal  to  prorate. 

The  true  principle  of  commodity  rate  making  is  to  more  nearly 
equalize  competitive  conditions,  but  the  general  effect  of  commodity 


274  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

rates  on  oil  has  been  to  give  the  Standard  relatively  much  lower 
rates  to  common  markets  than  those  given  to  its  competitors. 

For  instance,  in  shipments  to  New  Orleans  and  other  points  on 
the  lower  Mississippi  River  and  the  Gulf,  the  ordinary  class  rates  on 
similar  low-grade  articles  from  Toledo,  Cleveland,  and  Pittsburgh 
are  only  2  cents  above  the  rates  from  Whiting.  The  commodity 
rates  on  oil  are  from  9^  to  13 1  cents  above  the  rates  from  Whiting. 
The  normal  principle  of  commodity  rates  would  tend  to  make  the 
charge  the  same  from  all  four  of  these  points,  instead  of  increasing 
the  differential. 

Prior  to  the  establishment  of  the  Whiting  refinery  the  railroads 
west  of  the  Mississippi  prorated  with  the  eastern  roads  on  oil  ship- 
ments from  the  Pennsylvania  and  Ohio  districts  into  most  parts  of  the 
West  and  Southwest.  After  the  establishment  of  the  Whiting  refinery 
these  roads  refused  to  prorate  from  points  east  of  Whiting.  This 
refusal  increased  the  natural  disadvantage  of  the  eastern  refineries  by 
from  I  to  19^  cents  per  hundred  pounds.  This  discrimination  is  the 
more  conspicuous  in  the  case  of  the  southwestern  railroads  because 
they  do  prorate  with  the  railroads  from  Chicago  to  St.  Louis  on  oil 
from  Whiting  going  to  certain  sections. 

80.    EXTRACTS  FROM  THE  INTERSTATE  COMMERCE  ACT' 

Section  i.  {As  amended  June  2g,  igo6,  April  ij,  iqo8,  and  June 
18,  igio.)  That  the  provisions  of  this  Act  shall  apply  to  any  corpo- 
ration or  any  person  or  persons  engaged  in  the  transportation  of  oil 
or  other  commodity,  except  water  and  except  natural  or  artificial 
gas,  by  means  of  pipe  lines,  or  partly  by  pipe  lines  and  partly  by 
railroad,  or  partly  by  pipe  lines  and  partly  by  water,  and  to  telegraph, 
telephone,  and  cable  companies  (whether  wire  or  wireless)  engaged  in 
sending  messages  from  one  State,  Territory,  or  District  of  the  United 
States  to  any  other  State,  Territory,  or  District  of  the  United  States 
or  to  any  foreign  country,  who  shall  be  considered  and  held  to  be 
common  carriers  within  the  meaning  and  purpose  of  this  Act,  and  to 

'  An  act  to  regulate  commerce,  approved  February  4,  1887,  and  in  effect 
April  5,  1887  (24  Statutes  at  Large,  379L  as  amended  by  an  act  approved  March  2, 
1889  (25  Statutes  at  Large,  855),  by  an  act  approved  February  10,  1891  (26 
Statutes  at  Large,  743),  by  an  act  approved  February  8,  1895  (28  Statutes  at 
Large,  643),  by  an  act  approved  June  29,  1906  (34  Statutes  at  Large,  584),  by  a 
joint  resolution  approved  June  30,  1906  (34  Statutes  at  Large,  838),  by  an  act 
approved  April  13,  1908  (35  Statutes  at  Large,  60),  by  an  art  approved  February 
25,  1909  (35  Statutes  at  Large,  64.8),  and  by  an  act  approved  June  18,  1910  (36 
Statutes  at  Large,  539). 


MODERN  CAPITALISTIC  ORGANIZATION  275 

any  common  carrier  or  carriers  engaged  in  the  transportation  of 
passengers  or  property  wholly  by  railroad  (or  partly  by  railroad  and 
partly  by  water  when  both  are  used  under  a  common  control,  manage- 
ment, or  arrangement  for  a  continuous  carriage  or  shipment),  from 
one  State  or  Territory  of  the  United  States  or  the  District  of  Columbia 
to  any  other  State  or  Territory  of  the  United  States  or  the  District 
of  Columbia,  or  from  one  place  in  a  Territory  to  another  place  in  the 
same  Territory,  or  from  any  place  in  the  United  States  to  an  adjacent 
foreign  country,  or  from  any  place  in  the  United  States  through  a 
foreign  country  to  any  other  place  in  the  United  States,  and  also  to 
the  transportation  in  like  manner  of  property  shipped  from  any  place 
in  the  United  States  to  a  foreign  country  and  carried  from  such  place  to 
a  port  of  trans-shipment,  or  shipped  from  a  foreign  country  to  any  place 
in  the  United  States  and  carried  to  such  place  from  a  port  of  entry 
either  in  the  United  States  or  an  adjacent  foreign  country 

The  term  "common  carrier"  as  used  in  this  Act  shall  include 
express  companies  and  sleeping  car  companies.  The  term  "railroad" 
AS  used  in  this  Act  shall  include  all  bridges  and  ferries  used  or  operated 
in  connection  with  any  railroad,  and  also  all  the  road  in  use  by  any 
corporation  operating  a  railroad,  whether  owned  or  operated  imder 
a  contract,  agreement,  or  lease,  and  shall  also  include  all  switches, 
spurs,  tracks,  and  terminal  facilities  of  every  kind  used  or  necessary 
in  the  transportation  of  the  persons  or  property  designated  herein, 
and  also  all  freight  depots,  yards,  and  grounds  used  or  necessary  in 
the  transportation  or  delivery  of  any  of  said  property;  and  the  term 
"transportation"  shall  include  cars  and  other  vehicles  and  all  instru- 
mentalities and  facilities  of  shipment  or  carriage,  irrespective  of 
ownership  or  of  any  contract,  express  or  implied,  for  the  use  thereof 
and  all  services  in  connection  with  the  receipt,  delivery,  elevation, 
and  transfer  in  transit,  ventilation,  refrigeration  or  icing,  storage, 
and  handling  of  property  transported;  and  it  shall  be  the  duty  of 
every  carrier  subject  to  the  provisions  of  this  Act  to  provide  and 
furnish  such  transportation  upon  reasonable  request  therefor,  and 
to  establish  through  routes  and  just  and  reasonable  rates  applicable 
thereto;  and  to  provide  reasonable  facilities  for  operating  such 
through  routes  and  to  make  reasonable  rules  and  regulations  with 
respect  to  the  exchange,  interchange,  and  return  of  cars  used  therein, 
and  for  the  operation  of  such  through  routes,  and  providing  for 
reasonable  compensation  to  those  entitled  thereto. 

All  charges  made  for  any  service  rendered  or  to  be  rendered  in 
the  transportation  of  passengers  or  property  and  for  the  transmission 


276  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  messages  by  telegraph,  telephone,  or  cable,  as  aforesaid,  or  in 
connection  therewith,  shall  be  just  and  reasonable;  and  every  unjust 
and  unreasonable  charge  for  such  service  or  any  part  thereof  is 
prohibited  and  declared  to  be  unlawful 

And  it  is  hereby  made  the  duty  of  all  common  carriers  subject 
to  the  provisions  of  this  Act  to  establish,  observe,  and  enforce  just 
and  reasonable  classifications  of  property  for  transportation,  with 
reference  to  which  rates,  tariffs,  regulations,  or  practices  are  or  may 
be  made  or  prescribed,  and  just  and  reasonable  regulations  and 
practices  affecting  classifications,  rates,  or  tariffs,  the  issuance,  form, 
and  substance  of  tickets,  receipts,  and  bills  of  lading,  the  manner 
and  method  of  presenting,  marking,  packing,  and  delivering  property 
for  transportation,  the  facilities  for  transportation,  the  carrying  of 
personal,  sample,  and  excess  baggage,  and  all  other  matters  relating 
to  or  connected  with  the  receiving,  handling,  transporting,  storing, 
and  delivery  of  property  subject  to  the  provisions  of  this  Act  which 
may  be  necessary  or  proper  to  secure  the  safe  and  prompt  receipt, 
handling,  transportation,  and  delivery  of  property  subject  to  the 
provisions  of  this  Act  upon  just  and  reasonable  terms,  and  every  such 
unjust  and  unreasonable  classification,  regulation,  and  practice  with 
reference  to  commerce  between  the  States  and  with  foreign  countries 
is  prohibited  and  declared  to  be  unlawful. 

No  common  carrier  subject  to  the  provisions  of  this  Act  shall, 
after  January  first,  nineteen  hundred  and  seven,  directly  or  indirectly, 
issue  or  give  any  interstate  free  ticket,  free  pass,  or  free  transporta- 
tion for  passengers,  except  to  its  employees  and  their  families,  its 
ofl&cers,  agents,  surgeons,  physicians,  and  attorneys  at  law;  to 
ministers  of  religion,  [and  to  certain  others,  mainly  those  engaged  in 
charitable  work] 

From  and  after  May  first,  nineteen  hundred  and  eight,  it  shall 
be  unlawful  for  any  railroad  company  to  transport  from  any  State, 
Territory,  or  the  District  of  Columbia,  to  any  other  State,  territory, 
or  the  District  of  Columbia,  or  to  any  foreign  country,  any  article  or 
commodity,  other  than  timber  and  the  manufactured  products  thereof, 
manufactured,  mined,  or  produced  by  it,  or  under  its  authority,  or 
which  it  may  own  in  whole  or  in  part,  or  in  which  it  may  have  any 
interest,  direct  or  indirect,  except  such  articles  or  commodities  as  may 
be  necessary  and  intended  for  its  use  in  the  conduct  of  its  business 
as  a  common  carrier. 

Any  common  carrier  subject  to  the  provisions  of  this  Act,  upon 
application  of  any  lateral,  branch  line  of  railroad,  or  of  any  shipper 


MODERN  CAPITALISTIC  ORGANIZATION  277 

tendering  interstate  traffic  for  transportation,  shall  construct,  main- 
tain, and  operate  upon  reasonable  terms  a  switch  connection  with 
any  such  lateral,  branch  line  of  railroad,  or  private  side  track  which 
may  be  constructed  to  connect  with  its  railroad,  where  such  connec- 
tion is  reasonably  practicable  and  can  be  put  in  with  safety  and  will 
furnish  sufficient  business  to  justify  the  construction  and  maintenance 
of  the  same;  and  shall  furnish  cars  for  the  movement  of  such  traffic 
to  the  best  of  its  ability  without  discrimination  in  favor  of  or  against 
any  such  shipper 

Sec.  2.  That  if  any  common  carrier  subject  to  the  provisions  of 
this  Act  shall,  directly  or  indirectly,  by  any  special  rate,  rebate, 
drawback,  or  other  device,  charge,  demand,  collect,  or  receive  from 
any  person  or  persons  a  greater  or  less  compensation  for  any  service 
rendered,  or  to  be  rendered,  in  the  transportation  of  passengers 
or  property,  subject  to  the  provisions  of  this  act,  than  it  charges, 
demands,  collects,  or  receives  from  any  other  person  or  persons  for 
doing  for  him  or  them  a  like  and  contemporaneous  service  in  the 
transportation  of  a  like  kind  of  traffic  under  substantially  similar 
circumstances  and  conditions,  such  common  carrier  shall  be  deemed 
guilty  of  unjust  discrimination,  which  is  hereby  prohibited  and 
declared  to  be  unlawful. 

Sec.  3.  That  it  shall  be  unlawful  for  any  common  carrier  subject 
to  the  provisions  of  this  act  to  make  or  give  any  undue  or  imreasonable 
preference  or  advantage  to  any  particular  person,  company,  firm, 
corporation,  or  locality,  or  any  particular  description  of  traffic,  in  any 
respect  whatsoever,  or  to  subject  any  particular  person,  company, 
firm,  corporation,  or  locality,  or  any  particular  description  of  traffic 
to  any  undue  or  unreasonable  prejudice  or  disadvantage  in  any 
respect  whatsoever. 

Every  common  carrier  subject  to  the  provisions  of  this  Act  shall, 
according  to  their  respective  powers,  afford  all  reasonable,  proper, 
and  equal  facilities  for  the  interchange  of  traffic  between  their  respec- 
tive lines,  and  for  the  receiving,  forwarding,  and  delivering  of  pas- 
sengers and  property  to  and  from  their  several  lines  and  those  con- 
necting therewith,  and  shall  not  discriminate  in  their  rates  and  charges 
between  such  connecting  lines;  but  this  shall  not  be  construed  as 
requiring  any  such  common  carrier  to  give  the  use  of  its  tracks  or 
terminal  facilities  to  another  carrier  engaged  in  like  business. 

Sec.  4.  (As  amended  June  18,  igio.)  That  it  shall  be  unlawful 
for  any  common  carrier  subject  to  the  provisions  of  this  Act  to  charge 
or  receive  any  greater  compensation  in  the  aggregate  for  the  trans- 


278  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

portation  of  passengers,  or  of  like  kind  of  property,  for  a  shorter 
than  for  a  longer  distance  over  the  same  line  or  route  in  the  same 
direction,  the  shorter  being  included  within  the  longer  distance,  or 
to  charge  any  greater  compensation  as  a  through  route  than  the 
aggregate  of  the  intermediate  rates  subject  to  the  provisions  of  this 
Act;  but  this  shall  not  be  construed  as  authorizing  any  common 
carrier  within  the  terms  of  this  Act  to  charge  or  receive  as  great 
compensation  for  a  shorter  as  for  a  longer  distance:  Provided,  however, 
That  upon  application  to  the  Interstate  Commerce  Commission  such 
common  carrier  may  in  special  cases,  after  investigation,  be  authorized 
by  the  Commission  to  charge  less  for  longer  than  for  shorter  distances 
for  the  transportation  of  passengers  or  property;  and  the  Commission 
may  from  time  to  time  prescribe  the  extent  to  which  such  designated 
common  carrier  may  be  reheved  from  the  operation  of  this  section 

Whenever  a  carrier  by  railroad  shall  in  competition  with  a  water 
route  or  routes  reduce  the  rates  on  the  carriage  of  any  species  of 
freight  to  or  from  competitive  points,  it  shall  not  be  permitted  to 
increase  such  rates  unless  after  hearing  by  the  Interstate  Commerce 
Commission  it  shall  be  found  that  such  proposed  increase  rests  upon 
changed  conditions  other  than  the  elimination  of  water  competition. 

Sec.  5.  That  it  shall  be  imlawful  for  any  common  carrier  subject 
to  the  provisions  of  this  Act  to  enter  into  any  contract,  agreement, 
or  combination  with  any  other  common  carrier  or  carriers  for  the 
pooling  of  freights  of  different  and  competing  railroads,  or  to  divide 
between  them  the  aggregate  or  net  proceeds  of  the  earnings  of  such 
railroads,  or  any  portion  thereof;  and  in  any  case  of  an  agreement 
for  the  pooling  of  freights  as  aforesaid,  each  day  of  its  continuance 
shall  be  deemed  a  separate  offense. 

Sec.  6.  That  every  common  carrier  subject  to  the  provisions  of 
this  Act  shall  file  with  the  Commission  created  by  this  Act  and 
print  and  keep  open  to  public  inspection  schedules  showing  all  the 
rates,  fares,  and  charges  for  transportation 

No  change  shall  be  made  in  the  rates,  fares,  and  charges  or  joint 
rates,  fares,  and  charges  which  have  been  filed  and  published  by  any 
common  carrier  in  compliance  with  the  requirements  of  this  section, 
except  after  thirty  days'  notice  to  the  Commission  and  to  the 
public  published  as  aforesaid,  which  shall  plainly  state  the  changes 
proposed  to  be  made  in  the  schedule  then  in  force  and  the  time 
when  the  changed  rates,  fares,  or  charges  will  go  into  effect;  and 
the  proposed  changes  shall  be  shown  by  printing  new  schedules,  or 
shall  be  plainly  indicated  upon  the  schedules  in  force  at  the  time 


MODERN  CAPITALISTIC  ORGANIZATION  279 

and  kept  open  to  public  inspection:  Provided,  That  the  Commission 
may,  in  its  discretion  and  for  good  cause  shown,  allow  changes  upon 
less  than  the  notice  herein  specified,  or  modify  the  requirements  of 
this  section  in  respect  to  publishing,  posting,  and  filing  of  tariffs, 
either  in  particular  instances  or  by  a  general  order  applicable  to 

special  or  peculiar  circumstances  or  conditions 

Sec.  10 

Any  common  carrier  subject  to  the  provisions  of  this  Act,  orj 
whenever  such  common  carrier  is  a  corporation,  any  officer  or  agent 
thereof,  or  any  person  acting  for  or  employed  by  such  corporation, 
who,  by  means  of  false  billing,  false  classification,  false  weighing,  or 
false  report  of  weight,  or  by  any  other  device  or  means,  shall  know- 
ingly and  willfully  assist,  or  shall  willingly  suffer  or  permit,  any 
person  or  persons  to  obtain  transportation  for  property  at  less  than 
the  regular  rates  then  established  and  in  force  on  the  line  of  trans- 
portation of  such  common  carrier,  shall  be  deemed  guilty  of  a  mis- 
demeanor, and  shall,  upon  conviction  thereof  in  any  court  of  the 
United  States  of  competent  jurisdiction  within  the  district  in  which 
such  offense  was  committed,  be  subject  to  a  fine  of  not  exceeding 
five  thousand  dollars,  or  imprisonment  in  the  penitentiary  for  a 
term  of  not  exceeding  two  years,  or  both,  in  the  discretion  of  the 

court,  for  each  offense.     [Similar  penalty  for  the  shipper] 

Sec.  13.  {As  amended  June  18,  igio.)  That  any  person,  firm, 
corporation,  company,  or  association,  or  any  mercantile,  agricultural, 
or  manufacturing  society  or  other  organization,  or  any  body  politic 
or  municipal  organization,  or  any  common  carrier,  complaining  of 
anything  done  or  omitted  to  be  done  by  any  common  carrier  subject 
to  the  provisions  of  this  Act,  in  contravention  of  the  provisions  thereof, 
may  apply  to  said  Commission  by  petition,  which  shall  briefly  state 
the  facts;  whereupon  a  statement  of  the  complaint  thus  made  shall 
be  forwarded  by  the  Commission  to  such  common  carrier,  who  shall 
be  called  upon  to  satisfy  the  complaint,  or  to  answer  the  same  in 
writing,  within  a  reasonable  time,  to  be  specified  by  the  Commission. 
If  such  common  carrier  within  the  time  specified  shall  make  repara- 
tion for  the  injury  alleged  to  have  been  done,  the  common  carrier 
shall  be  relieved  of  liability  to  the  complainant  only  for  the  particular 
violation  of  law  thus  complained  of.  If  such  carrier  or  carriers  shall  not 
satisfy  the  complaint  within  the  time  specified,  or  there  shall  appear  to 
be  any  reasonable  ground  for  investigating  said  complaint,  it  shall  be 
the  duty  of  the  Commission  to  investigate  the  matters  complained 
of  in  such  manner  and  by  such  means  as  it  shall  deem  proper. 


28d  materials  for  elementary  economics 

Said  Commission  shall,  in  like  manner  and  with  the  same  authority 
and  powers,  investigate  any  complaint  forwarded  by  the  railroad 
commissioner  or  railroad  commission  of  any  State  or  Territory  at 
the  request  of  such  commissioner  or  commission,  and  the  Interstate 
Commerce  Commission  shall  have  full  authority  and  power  at  any 
time  to  institute  an  inquiry,  on  its  own  motion,  in  any  case  and  as 
to  any  matter  or  thing  concerning  which  a  complaint  is  authorized 
to  be  made,  to  cr  before  said  Commission  by  any  provision  of  this 
Act,  or  concerning  which  any  question  may  arise  under  any  of  the 
provisions  of  this  Act,  or  relating  to  the  enforcement  of  any  of  the 
provisions  of  this  Act.  And  the  said  Commission  shall  have  the 
same  powers  and  authority  to  proceed  with  any  inquiry  instituted 
on  its  own  motion  as  though  it  had  been  appealed  to  by  complaint 
or  petition  under  any  of  the  provisions  of  this  Act,  including  the 
power  to  make  and  enforce  any  order  or  orders  in  the  case,  or  relating 
to  the  matter  or  thing  concerning  which  the  inquiry  is  had  excepting 
orders  for  the  payment  of  money.  No  complaint  shall  at  any  time  be 
dismissed  because  of  the  absence  of  direct  damage  to  the  complainant. 

Sec.  15.  (As  amended  June  2g,  igo6,  and  June  18,  1910.)  That 
whenever,  after  full  hearing  upon  a  complaint  made  as  provided  in 
section  thirteen  of  this  Act,  or  after  full  hearing  under  an  order  for 
investigation  and  hearing  made  by  the  Commission  on  its  own  initia- 
tive (either  in  extension  of  any  pending  complaint  or  without  any 
complaint  whatever),  the  Commission  shall  be  of  opinion  that  any 
individual  or  joint  rates  or  charges  whatsoever  demanded,  charged, 
or  collected  by  any  common  carrier  or  carriers  subject  to  the  pro- 
visions of  this  Act  for  the  transportation  of  persons  or  property  or 
for  the  transmission  of  messages  by  telegraph  or  telephone  as  defined 
in  the  first  section  of  this  Act,  or  that  any  individual  or  joint  classifi- 
cations, regulations,  or  practices  whatsoever  of  such  carrier  or  carriers 
subject  to  the  provisions  of  this  Act  are  unjust  or  unreasonable  or 
unjustly  discriminatory,  or  unduly  preferential  or  prejudicial  or 
otherwise  in  violation  of  any  of  the  provisions  of  this  Act,  the  Com- 
mission is  hereby  authorized  and  empowered  to  determine  and  pre- 
scribe what  will  be  the  just  and  reasonable  individual  or  joint  rate 
or  rates,  charge  or  charges,  to  be  thereafter  observed  in  such  case 
as  the  maximum  to  be  charged,  and  what  individual  or  joint  classi- 
fication, regulation,  or  practice  is  just,  fair,  and  reasonable,  to  be 
thereafter  followed,  and  to  make  an  order  that  the  carrier  or  carriers 
shall  cease  and  desist  from  such  violation  to  the  extent  to  which  the 
Commission  finds  the  same  to  exist,  and  shall  not  thereafter  publish, 


MODERN  CAPITALISTIC  ORGANIZATION  281 

demand,  or  collect  any  rate  or  charge  for  such  transportation  or 
transmission  in  excess  of  the  maximum  rate  or  charge  so  prescribed, 
and  shall  adopt  the  classification  and  shall  conform  to  and  observe 
the  regulation  or  practice  so  prescribed.  All  orders  of  the  Com- 
mission, except  orders  for  the  payment  of  money,  shall  take  effect 
within  such  reasonable  time,  not  less  than  thirty  days,  and  shall 
continue  in  force  for  such  period  of  time,  not  exceeding  two  years, 
as  shall  be  prescribed  in  the  order  of  the  Commission,  unless  the  same 
shall  be  suspended  or  modified  or  set  aside  by  the  Commission,  or  be 
suspended  or  set  aside  by  a  court  of  competent  jurisdiction.  When- 
ever the  carrier  or  carriers,  in  obedience  to  such  order  of  the  Com- 
mission or  otherwise,  in  respect  to  joint  rates,  fares,  or  charges,  shall 
fail  to  agree  among  themselves  upon  the  apportionment  or  division 
thereof,  the  Commission  may,  after  hearing,  make  a  supplemental 
order  prescribing  the  just  and  reasonable  proportion  of  such  joint 
rate  to  be  received  by  each  carrier  party  thereto,  which  order  shall 
take  effect  as  a  part  of  the  original  order. 

Whenever  there  shall  be  filed  with  the  Commission  any  schedule 
stating  a  new  individual  or  joint  rate,  fare,  or  charge,  or  any  new 
individual  or  joint  classification,  or  any  new  individual  or  joint 
regulation  or  practice  affecting  any  rate,  fare,  or  charge,  the  Com- 
mission shall  have,  and  it  is  hereby  given,  authority,  either  upon 
complaint  or  upon  its  own  initiative  without  complaint,  at  once, 
and  if  it  so  orders,  without  answer  or  other  formal  pleading  by  the 
interested  carrier  or  carriers,  but  upon  reasonable  notice,  to  enter 
upon  a  hearing  concerning  the  propriety  of  such  rate,  fare,  charge, 
classification,  regulation,  or  practice;  and  pending  such  hearing  and 
the  decision  thereon  the  Commission  upon  filing  with  such  schedule 
and  delivering  to  the  carrier  or  carriers  affected  thereby  a  statement 
in  writing  of  its  reasons  for  such  suspension  may  suspend  the  opera- 
tion of  such  schedule  and  defer  the  use  of  such  rate,  fare,  charge, 
classification,  regulation,  or  practice,  but  not  for  a  longer  period  than 
one  hundred  and  twenty  days  beyond  the  time  when  such  rate,  fare, 
charge,  classification,  regulation,  or  practice  would  otherwise  go  into 
effect;  and  after  full  hearing,  whether  completed  before  or  after  the 
rate,  fare,  charge,  classification,  regulation,  or  practice  goes  into 
effect,  the  Commission  may  make  such  order  in  reference  to  such 
rate,  fare,  charge,  classification,  regulation,  or  practice  as  would  be 
proper  in  a  proceeding  initiated  after  the  rate,  fare,  charge,  classifica- 
tion, regulation,  or  practice  had  become  effective:  Provided,  That 
if  any  such  hearing  can  not  be  concluded  within  the  period  of  sus- 


282  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

pension,  as  above  stated,  the  Interstate  Commerce  Commission  may, 
in  its  discretion,  extend  the  time  of  suspension  for  a  further  period 
not  exceeding  six  months.  At  any  hearing  involving  a  rate  increased 
after  January  first,  nineteen  hundred  and  ten,  or  of  a  rate  sought  to 
be  increased  after  the  passage  of  this  Act,  the  burden  of  proof  to 
show  that  the  increased  rate  or  proposed  increased  rate  is  just  and 
reasonable  shall  be  upon  the  common  carrier,  and  the  Commission 
shall  give  to  the  hearing  and  decision  of  such  questions  preference 
over  all  other  questions  pending  before  it  and  decide  the  same  as 
speedily  as  possible. 

The  Commission  may  also,  after  hearing,  on  a  complaint  or  upon 
its  own  initiative  without  complaint,  establish  through  routes  and 
joint  classifications,  and  may  establish  joint  rates  as  the  maximum 
to  be  charged  and  may  prescribe  the  division  of  such  rates  as  herein- 
before provided  and  the  terms  and  conditions  under  which  such 
through  routes  shall  be  operated,  whenever  the  carriers  themselves 
shall  have  refused  or  neglected  to  establish  voluntarily  such  through 
routes  or  joint  classifications  or  joint  rates;  and  this  provision  shall 
apply  when  one  of  the  connecting  carriers  is  a  water  line.  The 
Commission  shall  not,  however,  establish  any  through  route,  classi- 
fication, or  rate  between  street  electric  passenger  railways  not  engaged 
in  the  general  business  of  transporting  freight  in  addition  to  their 
passenger  and  express  business  and  railroads  of  a  different  character, 
nor  shall  the  Commission  have  the  right  to  establish  any  route, 
classification,  rate,  fare,  or  charge  when  the  transportation  is  wholly 
by  water,  and  any  transportation  by  water  affected  by  this  Act 
shall  be  subject  to  the  laws  and  regulations  applicable  to  transporta- 
tion by  water 

If  the  owner  of  property  transported  under  this  Act  directly  or 
indirectly  renders  any  service  connected  with  such  transportation, 
or  furnishes  any  instrumentality  used  therein,  the  charge  and  allow- 
ance therefor  shall  be  no  more  than  is  just  and  reasonable,  and  the 
Commission  may,  after  hearing  on  a  complaint  or  on  its  own  initia- 
tive, determine  what  is  a  reasonable  charge  as  the  maximum  to  be 
paid  by  the  carrier  or  carriers  for  the  services  so  rendered  or  for  the 
use  of  the  instrumentality  so  furnished,  and  fix  the  same  by  appro- 
priate order,  which  order  shall  have  the  same  force  and  effect  and  be 
enforced  in  like  manner  as  the  orders  above  provided  for  under  this 
section 

Sec.  i6.  (Amended  March  2,  i88g,  June  zg,  igo6,  and  June  iS, 
iQio.)    That  if,  after  hearing  on  a  complaint  made  as  provided  in 


MODERN  CAPITALISTIC  ORGANIZATION  283 

section  thirteen  of  this  Act,  the  Commission  shall  determine  that 
any  party  complainant  is  entitled  to  an  award  of  damages  under  the 
provisions  of  this  Act  for  a  violation  thereof,  the  Commission  shall 
make  an  order  directing  the  carrier  to  pay  to  the  complainant  the 
sum  to  which  he  is  entitled  on  or  before  a  day  named 

Sec.  20.  {As  amended  June  2Q,  iqo6,  February  25,  igog,  and 
June  18,  igio.)  That  the  Commission  is  hereby  authorized  to 
require  annual  reports  from  all  common  carriers  subject  to  the  pro- 
visions of  this  Act,  and  from  the  owners  of  all  railroads  engaged  in 
interstate  commerce  as  defined  in  this  Act;  to  prescribe  the  manner 
in  which  such  reports  shall  be  made,  and  to  require  from  such  carriers 
specific  answers  to  all  questions  upon  which  the  Commission  may  need 

information Such  reports  shall  also  contain  such  information 

in  relation  to  rates  or  regulations  concerning  fares  or  freights,  or 
agreements,  arrangements,  or  contracts  affecting  the  same  as  the 
Commission  may  require;  and  the  Ccmmission  may,  in  its  discretion, 
for  the  purpose  of  enabling  it  the  better  to  carry  out  the  purposes  of 
this  Act,  prescribe  a  period  of  time  within  which  all  common  carriers 
subject  to  the  provisions  of  this  Act  shall  have,  as  near  as  may  be, 
a  uniform  system  of  accounts,  and  the  manner  in  which  such  accounts 
shall  be  kept 

Sec.  24.  {Added  June  2g,  igo6).  That  the  Interstate  Commerce 
Commission  is  hereby  enlarged  so  as  to  consist  of  seven  members  with 
terms  of  seven  years,  and  each  shall  receive  ten  thousand  dollars 
compensation  annually.  The  qualifications  of  the  Commissioners  and 
the  manner  of  the  payment  of  their  salaries  shall  be  as  already  pro- 
vided by  law.  Such  enlargement  of  the  Commission  shall  be  accom- 
plished through  appointment  by  the  President,  by  and  with  the  advice 
and  consent  of  the  Senate,  of  two  additional  Interstate  Commerce 

Commissioners Not  more  than  four  Commissioners  shall  be 

appointed  from  the  same  political  party 

{Commerce  Court  and  otiter  additional  provisions  in  the  Act  of  June 
18,  igio.)  (Sec.  i.)  That  a  court  of  the  United  States  is  hereby 
created  which  shall  be  known  as  the  Commerce  Court  and  shall  have 
the  jurisdiction  now  possessed  by  circuit  courts  of  the  United  States 
and  the  judges  thereof  over  all  cases  of  the  following  kinds: 

First.  All  cases  for  the  enforcement,  otherwise  than  by  adjudica- 
tion and  collection  of  a  forfeiture  or  penalty  or  by  infliction  of  criminal 
punishment,  of  any  order  of  the  Interstate  Commerce  Commission 
other  than  for  the  payment  of  money. 

Second.     Cases  brought  to  enjoin,  set  aside,  annul,  or  suspend 


284  MATERIALS  FOR  ELEME^^^ARY  ECONOMICS 

in  whole  or  in  part  any  order  of  the  Interstate  Commerce  Com- 
mission. 

Third.  Such  cases  as  by  section  three  of  the  Act  entitled  "An 
Act  to  further  regulate  commerce  with  foreign  nations  and  among 
the  States,"  approved  February  nineteenth,  nineteen  hundred  and 
three,  are  authorized  to  be  maintained  in  a  circuit  court  of  the  United 
States. 

Fourth.  All  such  mandamus  proceedings  as  under  the  provisions 
of  section  twenty  or  section  twenty-three  of  the  Act  entitled  "An 
Act  to  regulate  commerce,"  approved  February  fourth,  eighteen 
hundred  and  eighty-seven,  as  amended,  are  authorized  to  be  main- 
tained in  a  circuit  court  of  the  United  States. 

Nothing  contained  in  this  Act  shall  be  construed  as  enlarging  the 
jurisdiction  now  possessed  by  the  circuit  courts  of  the  United  States 
or  the  judges  thereof,  that  is  hereby  transferred  to  and  vested  in  the 
Commerce  Court. 

The  jurisdiction  of  the  Commerce  Court  over  cases  of  the  fore- 
going classes  shall  be  exclusive;  but  this  Act  shall  not  affect  the 
jurisdiction  now  possessed  by  any  circuit  or  district  court  oi  the 
United  States  over  cases  or  proceedings  of  a  kind  not  within  the 
above-enumerated  classes. 

The  Commerce  Court  shall  be  a  court  of  record,  and  shall  have  a 
seal  of  such  form  and  style  as  the  court  may  prescribe.  The  said 
Court  shall  be  composed  of  five  judges,  to  be  from  time  to  time 
designated  and  assigned  thereto  by  the  Chief  Justice  of  the  United 
States,  from  among  the  circuit  judges  of  the  United  States,  for  the 
period  of  five  years,  except  that  in  the  first  instance  the  Court  shall 
be  composed  of  the  five  additional  circuit  judges  to  be  appointed  as 
hereinafter  provided,  who  shall  be  designated  by  the  President  to 
serve  for  one,  two,  three,  four,  and  five  years,  respectively,  in  order 
that  the  period  of  designation  of  one  of  the  said  judges  shall  expire  in 
each  year  thereafter.  In  case  of  the  death,  resignation,  or  termina- 
tion of  assignment  of  any  judge  so  designated,  the  Chief  Justice  shall 
designate  a  circuit  judge  to  fill  the  vacancy  so  caused  and  to  serve 
during  the  unexpired  period  for  which  the  original  designation  was 
made.  After  the  year  nineteen  hundred  and  fourteen  no  circuit 
judge  shall  be  redesignated  to  serve  in  the  Commerce  Court  until  the 
expiration  of  at  least  one  year  after  the  expiration  of  the  period  of 
his  last  previous  designation.  The  judge  first  designated  for  the 
five-year  period  shall  be  the  presiding  judge  of  said  Court,  and  there- 
after the  judge  senior  in  designation  shall  be  the  presiding  judge. 


MODERN  CAPITALISTIC  ORGANIZATION  285 

Each  of  the  judges  during  the  period  of  his  service  in  the  com- 
merce court  shall,  on  account  of  the  regular  sessions  of  the  court  being 
held  in  the  city  of  Washington,  receive  in  addition  to  his  salary  as 
circuit  judge  an  expense  allowance  at  the  rate  of  one  thousand  five 
hundred  dollars  per  annum. 

The  President  shall,  by  and  with  the  advice  and  consent  of  the 
Senate,  appoint  five  additional  circuit  judges  no  two  of  whom  shall 
be  from  the  same  judicial  circuit,  who  shall  hold  office  during  good 
behavior  and  who  shall  be  from  time  to  time  designated  and  assigned 
by  the  Chief  Justice  of  the  United  States  for  service  in  the  circuit 
court  for  any  district,  or  the  circuit  court  of  appeals  for  any  circuit, 
or  in  the  commerce  court 

(Sec,  2.)  That  a  final  judgment  or  decree  of  the  Commerce 
Court  may  be  reviewed  by  the  Supreme  Court  of  the  United  States 
If  appeal  to  the  Supreme  Court  be  taken  by  an  aggrieved  party  within 
sixty  days  after  the  entry  of  said  final  judgment  or  decree.  Such 
appeal  may  be  taken  in  like  manner  as  appeals  from  a  circuit  court 
of  the  United  States  to  the  Supreme  Court,  and  the  Commerce  Court 
may  direct  the  original  record  to  be  transmitted  on  appeal  instead  of 
a  transcript  thereof.  The  Supreme  Court  may  affirm,  reverse,  or 
modify  the  final  judgment  or  decree  of  the  Commerce  Court  as  the 
case  may  require. 

Appeal  to  the  Supreme  Court,  however,  shall  in  no  case  supersede 
or  stay  the  judgment  or  decree  of  the  Commerce  Court  appealed  from, 
unless  the  Supreme  Court  or  a  justice  thereof  shall  so  direct,  and 
appellant  shall  give  bond  in  such  form  and  of  such  amount  as  the 
Supreme  Court,  or  the  justice  of  that  court  allowing  the  stay,  may 
require. 

An  appeal  may  also  be  taken  to  the  Supreme  Court  of  the  United 
States  from  an  interlocutory  order  or  decree  of  the  Commerce  Court 
granting  or  continuing  an  injunction  restraining  the  enforcement  of 
an  order  of  the  Interstate  Commerce  Commission,  provided  such 
appeal  be  taken  within  thirty  days  from  the  entry  of  such  order  or 
decree. 

Appeals  to  the  Supreme  Court  under  this  section  shall  have 
priority  in  hearing  and  determination  over  all  other  causes  except 
criminal  causes  in  that  court 


286  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

8i.     RAILWAY  RATE  THEORIES  OF  THE  INTERSTATE 
COMMERCE  COMMISSION' 

The  Commission  began  its  work  with  the  idea  that  vdue  of  service 
was  the  underlying  principle  of  railway  rates.  It  was  unable,  how- 
ever, to  furnish  such  a  precise  definition  or  explanation  of  this  terra 
as  would  enable  it  to  be  used  as  a  concrete  measure  of  a  reasonable 
rate. 

At  the  outset  of  its  labors  the  Commission  was  not  inclined  to 
place  much  confidence  in  cost  of  service  as  a  principle  for  determining 
rates.  The  feeling  that  rates  fixed  in  this  way  would  prevent  the 
free  movement  of  certain  commodities  explains  in  part  the  attitude 
of  the  Commissioners,  but  the  main  objection  has  seemed  to  be  the 
practical  impossibility  of  determining  the  exact  cost  of  transporting 
a  particular  commodity.  That  there  are  obstacles — insuperable 
ones — to  any  direct  determination  of  the  cost  of  performing  a  specific 
service  in  transportation  no  one  familiar  with  the  subject  would  deny. 
It  has  not  been  by  means  of  a  direct  determination  of  the  costs, 
however,  that  the  Commission  has  sought  a  solution.  The  method 
followed  has  been  that  of  comparison.  The  ascertainable  costs  of 
moving  a  certain  commodity  have  been  compared  with  the  costs  of 
moving  the  same  commodity  in  a  different  manner  or  under  different 
circumstances.  The  method  of  comparative  costs  does  not  yield 
absolutely  accurate  results  but  it  is  oftentimes  sufficient  for  practical 
purposes  and  we  must  remember  that  economics,  Uke  law,  does  not 
concern  itself  with  trifles. 

The  method  of  comparative  costs  has  not  always  been  applicable 
however.  In  some  cases,  as  we  have  seen,  distance  may  be  used  as  a 
means  of  measuring  the  reasonableness  of  rates.  Considered  as  the 
sole  element  in  the  determination  of  rates,  distance  would  of  course 
yield  unsatisfactory  results;  but  it  is  nevertheless,  as  the  Commission 
says,  "in  the  absence  of  other  influences  a  controlling  element." 
Its  value  as  a  measuring  instrument  lies  not  in  the  fact  that  it  is 
independent  of  costs  but  that  in  the  absence  of  other  influences  it 
reflects  costs. 

The  same  thing  may  be  said  of  the  effort  of  the  Commission  to 
preserve  for  a  place  its  natural  advantages  of  location.  A  place  can 
have  no  advantage  of  location  which  a  carrier  is  bound  to  respect 

'  Adapted  from  M.  B.  Hammond,  "Railway  Rate  Theories  of  the  Interstate 
Commerce  Commission,"  in  The  Quarterly  Journal  of  Economics,  XXV,  529-38 
(May,  191 1). 


«« 


MODERN  CAPITALISTIC  ORGANIZATION  287 

Other  than  that  which  is  due  to  its  ability  to  place  its  products  on  the 
market  at  less  cost  than  can  its  competitors.  Rates  based  on  the 
principle  of  recognizing  natural  advantages  of  location  are  therefore 
true  to  the  cost  of  service  principle. 

Even  in  the  absence  of  these  indirect  methods  of  determining 
costs,  the  Commission  has  found  it  possible  to  reach  the  same  goal 
by  other  methods.  It  is  a  fundamental  principle  of  economics  that 
free  and  untrammeled  competition,  operating  over  a  long  period  of 
time,  tends  to  reduce  prices  to  a  cost  basis.  We  have  therefore  only 
to  apply  this  principle  to  railway  rates  to  see  that  rates  which  have 
been  fixed  by  competition,  provided  that  this  competition  has  been 
of  a  normal  sort,  will  be  the  same  as  they  would  be  if  all  the  costs  of 
service  had  been  calculated  and  rates  had  then  been  based  on  costs. 

One  other  alternative  has  been  presented  to  the  Commission  in 
certain  cases  where  it  has  been  unable  to  calculate  the  costs  of  service 
and  this,  too,  has  been  in  accordance  with  well-known  economic 
principles.  What  the  economist  always  means  by  cost  price  is  that 
price  which  covers  not  only  actual  expenditures  made  in  production 
but  which  also  leaves  a  normal  rate  of  return  upon  all  the  capital  invested. 
In  those  cases,  therefore,  in  which  the  Commission  has  been  called 
upon  to  deal  with  a  whole  system  of  rates;  where  it  would  have  been 
clearly  impossible  to  have  calculated  all  the  costs;  where  even  the 
comparative  method  was  lacking  because  the  increase  of  rates  had 
been  made  general,  and  where  competition  was  not  present,  it  has 
still  been  possible  to  ask  whether  these  rates  have  yielded  the  same 
results,  measured  by  their  effect  on  earning  power,  as  would  have 
resulted  if  the  cost  of  service  principle  had  been  applied. 

Two  other  considerations  emphasized  by  the  Commission,  value 
of  commodity,  and  sectional  or  class  interests,  still  remain  to  be  dealt 
with.  With  reference  to  the  last-named  consideration  it  is  hard 
to  see  how  it  can  be  made  to  fit  in  with  any  defensible  theory  of 
railway  rates.  Many  of  the  cases  in  which  value  of  commodity  was 
made  the  basis  of  the  Commission's  decision  might  easily  have  been 
grouped  under  the  heading  of  cost  of  service.  This  is  because  differ- 
ences in  rates,  measured  by  differences  in  values  of  commodities, 
were  allowed  because  the  carrier  was  assumed  to  have  accepted 
greater  risks  in  transporting  the  more  valuable  commodities.  In 
other  cases  where  low  rates  were  prescribed  for  low-grade  commodities, 
for  example  such  articles  as  are  usually  given  commodity  rates,  it  is 
obvious  that  the  low  rates  could  have  been  justified  as  easily  on  the 


288  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

principle  that  the  costs  of  moving  these  commodities  were  lovr  as  ou 
the  basis  of  their  low  values. 

If  the  conclusion  be  accepted  that  the  tendency  of  the  Interstate 
Commerce  Commission's  decisions  is,  on  the  whole,  toward  a  cost 
of  service  theory  of  rate-making,  there  still  remains  the  task  of  so 
stating  a  theory  of  rates  as  to  bring  in  the  various  considerations 
which  we  have  seen  the  Commission  has  emphasized  as  factors  in 
rate-making,  and  show  how  they  can  be  related  to  the  fundamental 
principle.  It  is  perhaps  well  to  say  that  nowhere  has  the  Commis- 
sion undertaken  to  state  such  a  comprehensive  theory  of  rate-making. 

1.  In  any  system  of  government-made  or  government-regulated 
railway  rates,  it  would  seem  that  this  fundamental  economic  principle 
should  be  kept  in  mind:  to  perform  the  service  of  transporting 
persons  and  goods  with  the  least  possible  expenditure  of  social  energy. 

2.  One  transportation  route  or  one  transportation  system  should 
never  be  allowed  to  take  from  another  route  or  system,  merely  as  a 
consequence  of  competition,  traflSc  which  the  latter  route  or  system 
can  carry  at  less  expense. 

3.  Rates  should  be  so  adjusted  as  never  to  take  from  a  place  its 
natural  geographical  advantages  of  location;  but  natural  advantages 
should  not  be  so  construed  as  to  mean  monopoly  privileges. 

4.  Railway  rates  as  a  whole  should  just  cover  costs  as  a  whole, 
allowing  for  a  normal  rate  of  return  on  capital  actually  invested,  a 
normal  return  for  labor  of  all  sorts,  and  for  depreciation,  but  not  for 
betterments.  This  would  not  mean  that  superior  efficiency  in  rail- 
way management  was  not  entitled  to  reap  the  rewards  of  its  superiority 
in  the  same  way  as  it  does  in  the  ordinary  industrial  establishment 
where  competition  rules.  On  the  other  hand,  the  rule  must  not  be 
construed  to  mean  that  any  investment  in  a  railroad,  no  matter  how 
foolishly  or  recklessly  made,  is  entitled  to  exact  high  rates  from  persons 
and  industries  along  the  line  in  order  to  earn  current  interest  rates 
or  dividends.  Railway  property  is  not  more  sacred  than  other 
property,  nor  are  railway  investors  immune  from  the  consequences 
of  their  own  acts. 

5.  Each  commodity  transported  should,  as  far  as  possible,  be 
made  to  defray  its  own  share  not  only  of  operating  and  terminal 
costs  but  also  of  the  fixed  costs  and  dividends.  It  is  possible  under 
modem  accounting  methods  to  determine  these  costs  with  an  approxi- 
mate degree  of  accuracy  for  the  principal  commodities  and  classes 
of  traffic    The  rates  on  other  commodities  may  be  determined  by 


MODERN  CAPITALISTIC  ORGANIZATION  289 

comparing  their  ascertainable  costs  with  those  of  the  principal  com- 
modities, and  to  a  lesser  extent  by  a  comparison  of  the  relative 
values  of  the  commodities. 

6.  Differences  in  distance  may  be  made  a  test  of  the  reasonable- 
ness of  differences  in  rates  where  other  conditions  appear  to  be  similar; 
yet  the  general  rule  must  be  kept  in  mind  that  though  the  aggregate 
charge  should  increase  as  distance  increases,  the  ton-mile  rate  should 
decrease. 

7.  Where  the  application  of  none  of  the  above  principles  seems 
practicable,  competition,  which  has  been  conducted  in  a  normal 
manner  over  a  period  of  several  years,  may  be  assumed  to  have 
established  a  fair  relation  of  rates. 

8.  A  reasonable  rate  is  one  which  5delds  a  reasonable  compensa- 
tion for  the  service  rendered.  If  a  given  rate  is  reasonable  in  this 
sense,  an  increase  in  the  price  of  the  commodity  or  in  the  profits  to 
the  producer  will  not  be  a  valid  excuse  for  increasing  the  railway 
rate.  The  carrier  will  justly  share  in  the  increased  prosperity  of  the 
producer  by  securing  a  larger  traffic  in  this  commodity. 

The  possibility  of  applying  these  rules  to  the  business  of  railway 
transportation  is  proved  by  the  fact  that  the  application  of  every 
one  of  them  can  be  shown  by  illustrations  taken  from  the  Commission's 
decisions.  Their  consistent  application  would  mean  that  the  rail- 
roads would  neither  tax  the  industries  of  the  country  nor  have  their 
own  investments  sacrificed;  they  would  not  build  up  one  place  or 
industry  at  the  expense  of  some  other  place  or  industry;  they  would 
not  take  from  some  persons  or  commodities  their  proportionate  share 
of  the  costs  of  transportation  and  impose  them  upon  other  persons 
and  commodities;  and  finally  they  would  not  by  their  system  of  rate- 
making  retard  industrial  progress  or  have  their  own  development 
hindered  by  failing  credit  or  lack  of  revenue. 

82.    VALUATION  OF  PUBLIC  UTILITIES 

I^ 

If  a  railroad  corporation  has  bonded  its  property  for  an  amount 
that  exceeds  its  fair  value,  or  if  its  capitalization  is  largely  fictitious, 
it  may  not  impose  upon  the  public  the  b\irden  of  such  increased  rates 
as  may  be  required  for  the  purpose  of  realizing  profits  upon  such 
excessive  valuation  or  fictitious  capitalization;    and  the  apparent 

Smyth  vs.  Ames,  169  U.S.  466  (1898). 


290  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

value  of  the  property  and  franchises  used  by  the  corporation,  as 
represented  by  its  stocks,  bonds,  and  obligations,  is  not  alone  to 
be  considered  when  determining  the  rates  that  may  be  reasonably 
charged 

But  it  is  equally  true  that  the  corporation  performing  such  public 
services  and  the  people  interested  in  its  business  and  affairs  have 
rights  that  may  not  be  invaded  by  legislative  enactment  in  disregard 
of  the  fundamental  guaranties  for  the  protection  of  property.  The 
corporation  may  not  be  required  to  use  its  property  for  the  benefit  of 
the  public  without  receiving  just  compensation  for  the  services 
rendered  by  it.  How  such  compensation  may  be  ascertained,  and 
what  are  the  necessary  elements  in  such  inquiry,  will  always  be  an 
embarrassing  question 

We  hold,  however,  that  the  basis  of  all  calculations  as  to  the 
reasonableness  of  rates  to  be  charged  by  a  corporation  maintaining 
a  highway  under  legislative  sanction  must  be  the  fair  value  of  the 
property  being  used  by  it  for  the  convenience  of  the  public.  And  in 
order  to  ascertain  that  value,  the  original  cost  of  construction,  the 
amount  expended  in  permanent  improvements,  the  amount  and  mar- 
ket value  of  its  bonds  and  stock,  the  present  as  compared  with  the 
original  cost  of  construction,  the  probable  earning  capacity  of  the 
property  under  particular  rates  prescribed  by  statute,  and  the  sum 
required  to  meet  operating  expenses,  are  all  matters  for  consideration, 
and  are  to  be  given  such  weight  as  may  be  just  and  right  in  each  case. 
We  do  not  say  that  there  may  not  be  other  matters  to  be  regarded  in 
estimating  the  value  of  the  property.  What  the  company  is  entitled 
to  ask  is  a  fair  return  upon  the  value  of  that  which  it  employs  for  the 
public  convenience.  On  the  other  hand,  what  the  public  is  entitled 
to  demand  is  that  no  more  be  exacted  from  it  for  the  use  of  a  public 
highway  than  the  services  rendered  by  it  are  reasonably  worth. 

The  most  important  fact  to  be  determined  is  the  value  of  the 
property.  The  value  to  be  ascertained  is  the  value  at  the  time  of  the 
inquiry.  Only  that  property  is  to  be  considered  which  was  then 
used  and  useful  in  supplying  San  Francisco  with  water.  Among  the 
proper  matters  to  be  considered  are  the  original  cost  of  construction; 
the  amount  expended  in  permanent  improvements;  the  amount  and 
market  value  of  stock  and  bonds;    the  present,  as  compared  with 

'  Spring  Valley  Water  Works  vs.  San  Francisco,  192  Fed.  137  (191 1). 


MODERN  CAPITALISTIC  ORGANIZATION  291 

original,  cost  of  construction;  the  probable  earning  capacity  of  the 
property  under  the  particular  rates  prescribed  by  the  ordinance  for 
each  of  the  years  in  question;  the  sums  required  to  meet  operating 
expenses;  what  it  will  cost  to  obtain  water,  equal  in  quantity  and 
quality  to  the  present  supply,  from  the  next  most  available  source; 
the  depreciation  suffered  by  that  portion  of  the  plant  which  is  worn 
by  use  or  action  of  the  elements,  or  shorn  of  its  value  by  newer, 
cheaper,  and  more  efficient  appliances  and  machinery;  the  fact 
that  the  plant  has  a  franchise  and  is  a  going  concern,  with  an 
established  business  and  thousands  of  customers,  whose  buildings 
are  connected  with  the  distributing  system;  and  appreciation  in 
value  since  the  various  properties  constituting  the  plant  were  acquired. 
To  each  of  these  factors  just  and  proper  weight  must  be  given;  and 
finally,  the  result  must  be  the  reasonable  and  fair  value  of  the  plant 
as  between  the  company  and  the  public. 

Ill' 

The  most  important  facts  on  which  to  base  a  determination  of 
the  value  of  a  railroad  property  are: 

First.    The  actual  cost  of  construction. 

Second.     Cost  of  reproduction,  new. 

Third.    The  depreciated  value. 

Fourth.    The  amount  and  market  value  of  stock  and  bonds 

issued,  with  a  full  financial  history  of  the  road. 
Fifth.    The  density  of  population  and  traffic. 
Sixth.    The  nature  and  permanence  of  population  and  traffic. 
Seventh.     Facilities  for  doing  business. 
Eighth.    Physical  characteristics. 
Ninth.    The  amount  of  earnings  and  operating  expenses. 

83.    SUGGESTIONS  FOR  EFFECTIVE  PUBLIC  UTILITY 

REGULATION* 

The  first  essential  of  effective  control  of  public  service  corpora- 
tions is  an  efficient  administrative  body.  Experience  indicates  that 
a  board  or  commission  best  meets  the  requirements  of  the  problem. 
The  requisite  powers  are  too  great  to  be  entrusted  to  a  single  person, 

'  Statement  of  J.  C.  Lawrence,  Proceedings  of  National  Association  of  Railway 
Commissioners,  19 10. 

*  Adapted  from  E.  H.  Downey,  "The  Regulation  of  Urban  Utilities  in  Iowa," 
in  Applied  History,  I,  208-27.     State  Historical  Society  of  Iowa,  1912. 


293  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  a  large  body  is  too  cumbersome  for  efficiency.  A  commission  of 
three  members  is  probably  preferable  to  a  larger  board,  even  if  of 
equal  individual  ability.  Moreover,  a  given  sum  laid  out  in  salaries 
is  more  likely  to  secure  competent  men  if  divided  among  three  men 
than  if  distributed  to  five.  As  to  the  method  of  selection,  appoint- 
ment seems  to  secure  better  results  than  popular  election.  The  term 
of  office  should  not  be  less  than  six  years,  one  commissioner  being 
appointed  every  second  year.  Commissioners  should  devote  their 
entire  time  to  the  duties  of  the  office  and  should  have  no  connection, 
by  stock  ownership  or  otherwise,  with  any  public  utility. 

With  respect  to  personnel,  one  commissioner  should  be  an  attorney 
skilled  in  railroad  law  and  should  act  as  the  commission's  counsel, 
ex  officio.  Another  commissioner  should  be  a  public  utility  expert 
familiar  with  methods  of  valuation  and  accounting. 

Public  utility  regulation  is  a  scientific  matter.  If  the  regulation 
is  to  be  effective,  the  commission  must  be  composed  of  high  grade 
men,  and  it  must  be  provided  with  a  staff  of  rate  experts,  accountants, 
statisticians,  and  engineers  at  least  equal  to  the  staff  of  any  public 
service  company  in  the  state. 

The  act  should  embrace  the  following  utilities:  (a)  railroads, 
interurban  railroads,  express  companies,  sleeping  car,  dining  car, 
refrigerator  car,  tank  car  and  other  car  lines,  pipe  lines,  steamboats, 
and  all  other  carriers  between  cities;  (b)  telegraph,  telephone,  and 
other  transmission  companies,  lines  or  systems;  and  (c)  street  rail- 
ways, telephone  exchanges,  gas,  electric  and  water  works,  heating 
and  refrigerating  plants,  terminals,  ferries,  toll  bridges,  warehouses, 
elevators,  cold  storage  houses,  and  any  creamery,  slaughter-house, 
meat  packing  establishment,  and  any  milk,  coal,  or  ice  dealer  found 
upon  complaint  and  investigation  to  possess  substantial  monopoly 
power. 

The  terra  "public  utility"  should  be  so  defined  as  to  embrace 
municipalities  and  every  individual,  partnership,  firm,  corporation, 
association,  trustee  or  receiver  owning  or  operating  any  of  the  fore- 
going plants,  businesses,  or  industries,  and  also  any  corporation  or 
association  formed  for  the  purpose  of  acquiring,  or  authorized  to 
acquire,  or  which  has  acquired  any  utility  franchise.  This  last 
provision,  modeled  upon  the  New  York  law,  is  intended  to  reach 
inchoate  or  inactive  companies  which  acquire  franchises  and  hold 
them  until  such  time  as  they  become  valuable.  Some  of  the  busi- 
nesses above  enumerated  are  not  usually  classed  as  public  utilities 


MODERN  CAPITALISTIC  ORGANIZATION  293 

but  it  is  well  known  that  in  many  places  they  are,  and  tend  more 
and  more  to  become,  virtual  monopolies.  The  law  should  be  broad 
enough  to  cover  all  monopolies  and  explicit  enough  to  preclude 
evasion  by  a  mere  change  of  form. 

The  commission  should  be  required  to  ascertain,  as  speedily  as 
practicable,  the  fair  value  of  all  utility  properties  actually  devoted 
to  the  public  service  and  thereafter  to  keep  itself  informed  of  all  new 
construction  and  of  the  value  thereof.  No  particular  theory  of 
valuation  should  be  prescribed  in  the  statute,  since  none  now  com- 
mands universal  assent,  but  no  allowance  should  be  permitted,  in 
any  valuation  for  rate-making  or  for  municipal  purchase,  for  any 
franchise,  except  the  compensation  actually  paid  to  the  public  grantor. 
The  valuations  so  found  should  be  conclusive,  as  of  the  date  when 
made,  for  the  purpose  of  municipal  purchase  and  also  in  any  subse- 
quent proceeding  in  any  court  of  the  state.  This  last  provision  would 
save  the  vast  expense  of  taking  expert  testimony  in  litigation,  Mid  it 
would  also  serve  the  ends  of  justice  much  more  nearly  than  does  the 
ordinary  court  appraisal. 

Uniform  accounts,  to  be  prescribed  by  the  commission  for  each 
class  of  utilities,  should  be  compulsory.  Express  provision  should 
be  made  for  depreciation  accounts  and  for  the  maintenance  by  each 
utility  of  such  depreciation  fund  as  the  commission  shall  deem  ade- 
quate to  replace  the  plant  and  equipment  as  the  same  may  wear 
out  or  become  obsolete.  Both  ordinary  repairs  and  renewals  are 
properly  operating  expenses  which  ought  to  be  met  out  of  earnings 
before  dividends  are  declared  or  profits  computed.  Only  thus  can 
investors  be  protected  without  saddling  the  public  with  interest 
charges  upon  vanished  capital.  Further,  by  means  of  the  deprecia- 
tion accounts,  together  with  the  construction  accounts  above  spoken 
of,  continuing  valuations  will  be  automatically  secured  and  a  sound 
basis  established  for  rate-making. 

To  make  the  accounting  requirements  effective,  the  commission 
should  be  empowered  to  audit  the  accounts  of  any  utility  and  should 
be  required  to  examine  and  audit  the  books  of  municipal  plants. 
Municipally  operated  utilities  would  greatly  profit  by  such  super- 
vision as  would  compel  them  to  keep  intelligible  records.  Private 
investors,  also,  would  be  benefited  by  trustworthy  comparative  reports 
of  public  utilities. 

The  commission  should  have  full  power,  after  hearing,  to  fix  the 
exact  rates  for  each  class  of  service.     It  is  not  sufiicient  to  prescribe 


294  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

simply  maximum  rates.  In  most  cases  when  any  change  of  rates  is 
necessary,  justice  as  between  consumers  requires  revision  of  the  entire 
schedule.  To  simplify  the  commission's  work  and  to  secure  uni- 
formity each  utility  should  be  required  to  publish  and  file  schedules 
showing  all  rates  in  force.  No  change  in  the  schedule  should  be 
permitted  without  thirty  days'  notice  to  the  commission,  nor  any 
increase  over  the  rates  eflfective  at  a  given  date  without  the  com- 
mission's assent.  Unlawful  discrimination  should  be  defined  with 
some  particularity,  and  any  departure  from  the  published  schedules 
or  any  greater,  less,  or  different  charge  to  one  person  than  to  another 
for  a  like  and  contemporaneous  service  should  be  expressly  prohibited. 
As  a  further  precaution  the  commission  should  be  authorized  to 
cancel  discriminatory  contracts,  even  those  which  antedate  the 
passage  of  the  act.  Such  a  power  may  appear  anomalous;  but 
there  is  no  good  reason  for  the  continuance  of  an  admitted  wrong, 
and  what  is  more,  discriminatory  agreements  are  unlawful  and  hence 
ab  initio  void  at  common  law. 

The  commission  should  have  power  to  prescribe  standards  of 
products  and  services,  standard  units  of  measurement,  standard 
measuring  appliances,  standard  safety  equipment,  and  rules  for  the 
protection  of  the  health  and  safety  of  employees  and  of  the  public. 
It  should  be  authorized,  after  hearing,  to  require  improved  service 
or  facilities,  additions  to  plant  or  equipment,  and  extensions  to  new 
territory  when  reasonably  necessary  to  the  public  service.  To  make 
these  provisions  effective,  the  commission  should  be  required,  through 
competent  agents  and  with  reasonable  frequency,  to  inspect  railway 
tracks,  bridges,  and  equipment,  and  other  utility  properties,  to  test 
the  purity,  pressure,  heat  value  and  illuminating  power  of  gas,  the 
voltage  of  electric  currents,  the  initial  efficiency  of  electric  lamps, 
the  purity  of  water,  the  strength  of  fire  streams,  and  the  adequacy 
of  telephone,  street  railway,  and  other  utility  service,  and  to  compel, 
upon  the  reports  of  its  inspectors,  and  without  formal  hearings,  full 
compliance  with  standards  fixed  by  law  or  by  the  lawful  orders  of  the 
commission.  Utilities  should  be  required  to  provide  standard  prov- 
ing apparatus,  to  prove  meters,  test  service,  and  keep  station  records 
according  to  the  rules  prescribed  by  the  commission.  No  utility 
should  be  allowed  to  install  any  gas  or  water  meter  until  tested, 
approved,  and  scaled  by  an  official  inspector,  nor  any  electric  meter 
of  a  type  not  approved  by  the  commission. 


MODERN  CAPITALISTIC  ORGANIZATION  295 

No  provisions  of  a  public  utilities  act  are  more  important  or 
require  closer  attention  than  those  respecting  capitalization.  Word- 
ing as  well  as  substance  needs  to  be  watched  with  jealous  care  to 
guard  against  evasion.  Effective  control  of  capitahzation  must 
embrace  at  least  the  following  features: 

First.  The  issue  of  stocks,  bonds,  or  any  form  of  note  or  deben- 
ture running  more  than  twelve  months,  should  be  permitted  only 
for  the  acquisition  of  property,  new  construction,  or  other  purpose 
properly  chargeable  to  capital  account — and  then  only  with  the 
authorization  of  the  commission  and  only  to  the  amount  and  for  the 
purposes  and  upon  the  terms  authorized  by  the  commission,  which 
should  be  further  charged  with  the  duty  of  seeing  that  such  terms  and 
conditions  are  fulfilled. 

Second.  No  utility  should  be  permitted  to  issue  capital  stock  at 
less  than  par,  fully  paid  in  cash,  or  in  property  at  a  valuation  fixed  by 
the  commission.  The  securities  of  a  new  or  reorganized  company 
should  be  limited  to  an  amount  not  exceeding  in  the  aggregate  the 
structural  value  of  its  plant  and  equipment,  the  reasonable  expenses 
of  organization,  and  the  cash  actually  in  hand — all  to  be  ascertained 
and  certified  by  the  commission. 

Third.  Payment  for  labor  or  services  in  stock  or  other  securities 
and  the  capitalization  of  any  franchise  at  more  than  the  compensa- 
tion actually  paid  to  the  public  grantor  thereof,  or  of  "good  will" 
at  any  amount,  should  be  expressly  prohibited.  To  permit  the 
promoter  or  underwriter  to  receive  a  block  of  stock  is  to  encourage 
speculative  enterprises  and  open  the  door  to  overcapitalization. 
Legitimate  services  of  organization  should  be  compensated  in  the 
same  way  as  the  work  of  an  engineer  or  building  contractor.  "  Good 
will"  obviously  has  no  application  to  a  monopoly,  and  a  public  grant 
should  not  be  made  the  means  of  extraordinary  profits. 

Fourth.  Stock  or  scrip  dividends,  shareholders'  privileged  sub- 
scriptions to  stock  or  bonds,  and  every  other  form  of  "melon  cutting" 
should  be  expressly  forbidden.  As  a  preventive,  all  stock  and  other 
securities  should  be  offered  at  public  sale.  It  should,  however,  be 
provided  that  a  minimum  or  refusal  price  may  be  fixed  by  the  issuing 
corporation,  and  that  the  securities  may  be  offered  in  successive 
blocks  or,  with  the  commission's  approval,  be  marketed  through 
underwriters.  Without  such  safeguards  public  sale  might  depress 
the  price  of  securities  below  their  real  value. 


296  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Mergers,  under  proper  safeguards,  ought  to  be  encouraged.  The 
amalgamation  of  competing  utilities  avoids  much  senseless  waste. 
There  are  marked  economies  also  in  the  joint  operation  of  a  telegraph 
and  a  telephone  system,  of  a  street  railway  and  a  commercial  power 
plant,  or  of  a  gas  and  an  electric  lighting  establishment.  It  may 
even  be  advantageous  to  combine  all  the  utilities  of  the  same  com- 
munity. Such  a  consolidation  would  effect  important  savings  in 
superintendence  and  office  expenses,  in  the  cost  of  reading  meters 
and  making  collections,  in  the  purchase  of  fuel  and  materials,  and 
in  the  engineering  and  construction  departments.  Under  such  restric- 
tions as  will  secure  to  the  public  a  fair  share  in  these  economies,  the 
consolidation  of  utilities  in  the  same  territory  is  an  advantage  to 
consumers  as  well  as  owners. 

To  protect  the  public,  while  permitting  legitimate  consolidations, 
three  restrictions  appear  to  be  necessary: 

First.  No  utility  shall  sell,  assign,  convey,  lease,  mortgage, 
create  any  lien  against,  or  transfer  in  any  manner  whatsoever,  its 
franchise,  works,  plant,  or  property  of  any  description  (except 
materials  and  supplies  disposed  of  in  the  ordinary  course  of  business), 
without  first  obtaining  from  the  commission  a  certificate  of  approval, 
to  be  granted  or  refused  within  the  discretion  of  the  commission; 
and  then  only  upon  terms  and  conditions  approved  by  the  commission. 

Second.  No  corporation,  company,  partnership,  firm  or  associa- 
tion shall  acquire  more  than  ten  per  cent  of  the  stock,  bonds,  or  other 
securities  of  any  utility,  except  with  the  commission's  approval  as 
above  set  forth. 

Third.  The  securities  issued  in  exchange  for  any  utility  plant 
or  property,  or  for  the  stock  or  bonds  thereof,  shall  not  exceed  the 
structural  value  of  the  property  devoted  to  the  public  service,  the 
"going  value"  of  the  business  (in  which  term  shall  be  included  only 
the  reasonable  expenses  of  organization  and  the  reasonable  costs  of 
building  up  tlie  business)  and  the  compensation  actually  paid  to  the 
public  grantor  for  its  franchise — all  to  be  ascertained  and  certified 
by  the  commission. 

In  view  of  the  uniform  failure  of  attempts  at  competition,*  of  the 
enormous  losses  which  have  been  incurred  in  such  attempts,  and  of 

■"There  are  few  things  which  the  industrial  history  of  advanced  nations 
proves  more  conclusively  than  that  competition  in  the  field  of  public  utilities  has 
failed  to  insure  reasonably  adequate  service  at  reasonable  rates." — B.  H.  Meyer, 
in  American  Political  Science  Review,  V,  386. 


MODERN  CAPITALISTIC  ORGANIZATION  297 

the  increases  of  capitalization  and  deterioration  of  service  that  usually 
have  followed  upon  the  abandonment  of  these  experiments,  it  can 
hardly  be  doubted  that  regulated  monopoly  is  the  wiser  policy. 
None  the  less,  the  power  to  permit  competition  may  well  be  retained 
as  a  threat  or  club  to  hold  monopolists  to  the  faithful  performance 
of  their  public  duties.  These  two  objects  are  probably  best  secured 
by  prohibiting  the  establishment  of  any  utility  in  competition  with 
one  already  in  existence  unless  the  commission,  after  notice  to  all 
parties  concerned  and  a  hearing,  shall  find  and  certify  that  public 
convenience  and  necessity  require  such  additional  utility. 

With  respect  to  the  granting  of  franchises,  two  restrictions  appear 
necessary  for  the  protection  of  investors  as  well  as  of  the  public: 

First.  No  franchise  granted  by  any  municipality  or  other 
political  subdivision  of  the  state  should  be  valid  or  operative  until 
and  unless  the  commission,  after  hearing,  shall  find  that  such  franchise 
is  necessary  and  proper  for  the  public  convenience  and  properly 
conserves  the  public  interests;  and  the  commission  should  be  expressly 
empowered  to  impose  such  conditions  as  to  construction,  equipment 
maintenance,  service,  or  operation  as  the  public  interests  may  require. 
Such  a  provision,  coupled  with  the  referendum  requirement  would 
go  far  to  do  away  with  corruption  in  the  granting  of  franchises. 
What  is  equally  important,  "jokers"  would  have  little  chance  of 
surviving  the  triple  ordeal  of  the  city  council,  the  electorate,  and  the 
commission. 

Second.  The  indeterminate  permit  law  of  Wisconsin  has  given 
general  satisfaction  ,both  to  the  public  and  to  the  utilities  affected. 
Under  it  the  companies  are  assured  of  their  rights  in  the  streets  and 
of  protection  against  competition  so  long  as  they  render  reasonably 
satisfactory  service  at  reasonable  rates.  They  have  no  need  to  dicker 
with  the  local  authorities  for  renewals  of  expiring  grants.  They  are 
relieved  from  all  fear  of  being  forced  to  sacrifice  their  property  at 
the  expiration  of  any  franchise  and  from  all  necessity  of  amortizing 
their  investment.  The  municipalities,  for  their  part,  are  no  longer 
bound  by  rigid  contracts  running  for  definite  terms  of  years.  If  any 
utiHty  fails  to  furnish  adequate  service  another  company  may  be 
chartered  by  the  city,  with  the  commission's  consent,  without  regard 
to  existing  franchises.  If  any  city  wishes  to  operate  its  own  utilities 
it  need  not  wait,  as  now,  for  the  termination  of  a  grant. 

Municipalities  should  have  power  to  construct,  acquire  and 
operate  street  railways,  gas,  electric,  and  water  works,  ferries,  bridges, 


298  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

markets,  elevators,  warehouses,  cold  storage  houses,  commercial 
heating  and  refrigerating  plants,  and  possibly  other  urban  utilities. 
This  list  is  much  longer  than  the  present  laws  allow;  but  all  the 
enterprises  mentioned  have  been  successfully  managed  by  European 
cities,  and  experiments  in  municipal  operation,  under  proper  safe- 
guards, ought  to  be  encouraged. 

Municipal  plants  should  be  subject  to  the  commission's  jurisdic- 
tion with  respect  to  accounts,  rates,  and  service  to  the  same  extent 
as  privately  owned  utilities.  A  public  undertaking,  to  be  sure,  has 
not  the  same  motive  as  a  private  monopoly  to  exploit  its  patrons. 
But  there  is  considerable  danger  that  private  consumers  may  be 
compelled  to  pay  for  service  furnished  gratis  to  the  city  or,  on  the 
contrary,  that  rates  may  be  made  so  low  as  to  not  provide  for  interest, 
upkeep,  and  depreciation.  Wisconsin's  experience  shows  that  munici- 
pal utilities  are  likely  to  discriminate  as  between  different  classes  of 
private  consumers;  and  even  personal  discrimination  may  be  brought 
about  by  political  influence  or  otherwise.  Service,  also,  is  sure  to 
be  improved  by  state  inspection  and  the  requirement  of  station 
records. 

Every  municipality  should  have  power  (i)  to  determine  by 
franchise,  contract,  ordinance,  or  otherwise  the  terms  and  conditions 
upon  which  any  utility  may  occupy  its  streets,  alleys,  and  other 
public  places;  (2)  to  exercise  continuing  police  control  over  poles, 
wires,  conduits,  tracks,  and  other  structures  in,  under,  over,  or  along 
such  highways  or  public  places,  and  over  all  cars  or  other  vehicles 
operated  thereon;  and  (3)  to  require  additions  to  plant  or  equipment 
or  extensions  into  new  territory.  To  prevent  injustice  an  appeal 
should  lie  to  the  commission  which  should  be  empowered  to  set 
aside  any  ordinance,  contract,  or  franchise  which  it  might  find  to 
be  unreasonable,  unlawful,  or  prejudicial  to  the  public  interest;  but 
no  utility  should  be  permitted  to  occupy  the  highways  of,  or  operate 
within,  any  municipality  without  first  obtaining  the  consent  of  the 
city  council  and  of  a  majority  of  the  qualified  electors  voting  thereon. 

It  is  desirable  to  confine  appeals  from  the  commission  to  the 
courts  within  somewhat  narrow  limits,  not  alone  to  save  litigation 
but  to  make  the  intended  regulation  effective.  An  administrative 
board  constituted  like  the  Railroad  Commission  of  Wisconsin  is  far 
better  fitted  than  any  court  in  the  land  to  pass  upon  the  reasonable- 
ness of  rates,  the  adequacy  of  service,  or  the  necessity  of  additional 
stocks  or  bonds.    The  commission  is  more  expert  in  such  matters 


MODERN  CAPITALISTIC  ORGANIZATION  299 

than  any  court  can  ever  become;  it  has  much  ampler  and  more 
trustworthy  sources  of  information;  it  is  equally  judicious;  and  it 
is  unhampered  by  that  technicality  which  has  ever  been  the  mother 
of  the  law's  delays..  There  is  no  merit  in  the  suggestion  that  the 
final  determination  of  such  questions  by  an  administrative  board 
would  be  an  arbitrary  exercise  of  power.  Final  decision  must  be 
vested  somewhere,  and  may  very  properly  be  entrusted  to  the  tribunal 
which  is  best  fitted  to  exercise  it. 

Ideally,  then,  the  commission's  findings  should  be  final  as  to 
facts,  including  even  ultimate  conclusions  of  fact,  and  should  be 
reviewable  only  on  the  grounds  that  the  commission  has  exceeded 
its  authority,  or  that  it  has  not  proceeded  in  accordance  with  law. 
Reason  and  analogy  support  such  a  limitation  of  judicial  review. 

The  courts  in  the  United  States  are  committed,  however,  to  the 
doctrine  of  judicial  control  over  rate-making.  It  is  not  possible, 
therefore,  to  make  the  decision  of  an  administrative  body  conclusive 
as  to  the  reasonableness  of  rates  or  of  orders  affecting  property  rights. 
The  utmost  that  can  be  done  is  to  hedge  about  judicial  review  upon 
these  matters  with  such  safeguards  as  will  serve  to  make  the  public 
service  commission  something  more  than  an  advisory  body.  There 
is  no  doubt  that  a  state  may  to  the  extent  permitted  by  its  constitu- 
tion limit  the  jurisdiction  of  its  own  courts;  and  it  appears  to  be 
settled  that  when  a  limited  judicial  review  is  permitted  by  the  laws 
of  the  state  parties  will  be  required  to  exhaust  their  remedies  there 
before  applying  to  the  federal  courts. 

B.    INDUSTRIAL  COMBINATIONS 
84.   FORMS  OF  COMBINATION' 

"   I.    AGREEMENTS   ON   PRICES   AND   PRODUCTION 

Although  the  principle  of  combination  seems  to  have  become 
firmly  established  in  the  industrial  life  of  the  United  States  and  the 
leading  coimtries  of  Europe,  the  forms  have  varied  materially.  These 
forms  have  depended  in  part  upon  the  business  habits  of  the  com- 
munity, the  condition  of  the  business,  and  the  commercial  laws  of  the 
various  states  and  countries.  The  strongest  forms  of  combination 
appear  to  have  been  promoted  by  laws  intended  to  prevent  them. 

In  all  coimtries  the  forms  of  combination  which  first  appeared  were 
merely  agreements,  among  competing  manufacturers  or  dealers,  with 

'  From  the  Report  of  the  Industrial  Commission,  XIX,  605-8;  I,  21. 


3CX3  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

reference  to  prices.  When  competition  lowered  prices  beyond  the 
remunerative  px)int,  it  was  a  common  practice,  both  in  local  markets 
and  in  the  wider  business  field,  for  competitors  to  agree  that  prices 
should  not  be  cut  beyond  a  point  named,  which  would  give  to  all 
parties  a  fair  return.  Sometimes,  even  when  no  formal  agreement  is 
reached,  the  exigencies  of  trade  will  lead  competitors  to  establish  a 
customary  price  high  enough  to  enable  them  to»keep  in  profitable 
business. 

Arrangements  among  railroads  for  restricting  competition  some- 
times amount  merely  to  agreements  to  maintain  rates,  and  sometimes 
go  to  the  extent  of  a  division  of  trafiBc  or  receipts  under  a  pool.  It  is 
also  well  known  that  our  great  steel  manufactiirers  generally  for  a 
number  of  years  have  had  agreements  regarding  the  prices  on  steel 
rails,  steel  billets,  and  other  leading  products  of  a  kind  manufactured 
by  all. 

Closely  connected  with  the  agreement  as  to  prices  is  often  found  an 
agreement  regarding  the  extent  of  the  output.  This  is  particularly 
true  where  the  market  is  Umited  and  where  the  number  of  producers 
is  small,  so  that  by  an  agreement  for  the  limitation  of  production, 
prices  can  be  readily  regulated.  Such  an  agreement  has  prevailed 
for  many  years  among  the  French  sugar  refiners,  and  is  generally 
kno\sTi  as  the  French  sugar  trust.  From  time  to  time,  usually 
monthly,  the  half-dozen  leading  French  sugar  refiners,  producing  a 
large  percentage  of  the  total  of  refined  sugar,  meet,  and  agree  upon  the 
quantity  which  the  market  seems  to  demand  for  the  succeeding 
month.  Each  refiner  is  allowed  his  fixed  percentage  and  if  he  exceeds 
it  he  is  fined.  Although  agreements  of  this  sort  do  not  regularly 
contain  a  clause  fixing  the  price  of  the  product,  the  adaptation  of  the 
supply  to  the  probable  demand  determines  substantially  what  the 
price  shall  be.  Sometimes,  instead  of  limiting  the  product,  the 
marketing  territory  is  divided  among  the  producers,  each  being  bound 
not  to  enter  the  territory  of  his  former  competitors. 

In  nearly  all  countries,  as  soon  as  under  such  agreements  business 
begins  to  be  imusually  profitable,  the  temptation  for  each  party  to 
extend  his  sales,  by  shading  the  price  or  entering  the  territory  of  his 
rival,  becomes  so  strong  that  some  will  secretly  break  the  agreement. 
This  often  happened  in  the  case  of  both  the  whisky  and  railroad  pools 
in  this  country.  Such  violation  of  the  contract  led  invariably  to  the 
failiure  of  the  pool  and  a  method  had  to  be  devised  to  prevent  these 
practices.     For  example,  to  prevent  the  breaking  of  agreements,  a 


MODERN  CAPITALISTIC  ORGANIZATION  361 

forfeit  is  fixed;  and  in  order  that  infractions  may  be  discovered,  some- 
times each  party  to  the  agreement  is  given  access  to  the  books  of  his 
rivals,  but  more  frequently  such  examination  is  left  to  a  small  execu- 
tive committee  trusted  by  all.  Frequently,  to  insure  the  payment  of 
a  fine  imposed,  each  party  to  the  agreement  is  required  to  deposit  the 
amount  of  the  forfeit,  either  in  cash  or  in  readily  negotiable  securities, 
in  the  hands  of  an  executive  committee  or  of  third  parties.  If  the 
laws  of  the  coimtry  recognize  such  agreements  as  legal,  this  form  of 
agreement  upon  prices  and  output  is  likely  to  become  permanent. 
Such  is  the  form  which  exists,  generally,  in  Germany  and  Austria. 
The  German  courts  hold  such  agreements  valid. 

II.    SELLING   BUREAUS 

The  failure  of  agreements  as  to  prices  and  production,  owing  to 
disapproval  by  the  courts,  has  led  to  other  devices.  The  one  most 
common  in  Europe,  and  at  times  found  in  the  United  States,  has 
been  that  of  the  selling  bureau.  In  France  and  Germany  these 
bureaus  are  ordinarily  organized  with  members  from  each  of  the 
establishments  entering  the  arrangement.  This  bureau  takes  cogni- 
zance of  market  conditions,  and  estimates  the  amount  of  product 
required  to  supply  the  trade;  it  then  allots  to  each  establishment  the 
output  considered  its  share,  takes  all  orders  for  goods,  fixes  prices, 
and  manages  the  entire  selling  business.  Sometimes  the  different 
establishments  are  allowed  to  do  more  or  less  independent  selling 
under  a  rigid  system  of  accounting,  with  penalties  if  the  rules  are 
broken. 

The  former  Michigan  Salt  Association  in  the  United  States,  the 
Comptoir  metallurgique  de  Longwy  in  France,  and  the  Westphalian 
Coal  Syndicate  in  Germany  are  striking  examples  of  this  kind  of 
agreement  system.  All  worked  successfully  for  many  years,  and  the 
last  two  named  are  still  in  operation.  The  weakness  of  these  forms  of 
agreement  was  foimd  to  be  in  their  doubtful  legality  in  some  coimtries. 
They  are  inefl&cient,  because  they  do  not  permit  of  central  manage- 
ment of  the  manufacturing  plants. 

III.    THE   TRUST 

Feeling  the  necessity  of  more  complete  control  over  its  separate 
manufacturing  establishments  than  had  been  possible  imder  the  loose 
agreements  of  the  preceding  ten  years,  the  Standard  Oil  Company 
in  1882  arranged  with  its  associate  companies  to  organize  a  "tn:st," 
with  the  form  and  powers  previously  mentioned. 


302  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

In  this  form  of  organization  the  Standard  Oil  was  followed  by  the 
whisky  trust,  the  sugar  trust,  and  others.  Experience  soon  showed 
that  the  trusts  were  irresponsible  bodies,  hard  to  control  by  the  courts. 
There  were  no  laws  providing  for  the  organization  of  such  institutions; 
the  trustees  in  various  instances  did  not  keep  proper  records  which 
they  were  ready  to  produce  in  court;  and  the  new  form  of  business 
organization  at  once  met  with  popular  and  judicial  disapproval.  In 
1890  the  sugar  trust  was  declared  illegal  in  the  State  of  New  York, 
under  the  common  law. 

As  a  consequence,  all  trusts  of  this  form  were  soon  dissolved  and 
the  combinations  reorganized  in  a  different  way.  With  the  exception 
of  the  Standard  Oil  Company  they  became  single  corporations,  and 
combinations  since  established  have  regularly  taken  this  form. 

IV.    THE   CORPORATION   FORM 

When  it  is  proposed  to  consolidate  different  establishments  under 
the  corporation  form,  it  has  been  customary  to  organize  a  single  new 
corporation  to  purchase  and  own  the  various  plants.  These  plants 
are  sometimes  paid  for  in  cash;  more  frequently  in  the  securities  of  the 
new  corporation.  When  the  plants  to  be  combined  have  been  owned 
by  corporations,  it  has  been  usual  to  effect  an  exchange  of  the  stock 
of  the  new  corporation  for  the  stock  of  the  old  companies  at  an  agreed 
ratio.  The  separate  corporations  may  then  be  dissolved  and  the 
plants  remain  in  the  ownership  of  the  new  corporation. 

This  was  the  plan  followed  by  the  whisky  trust  upon  its  reorganiza- 
tion into  the  Distilling  and  Cattle  Feeding  Company,  and  by  the 
American  Sugar  Refining  Company  when  it  was  reorganized. 

If  the  separate  plants  have  not  been  owned  by  corporations,  a  com- 
mon plan  of  the  later  combinations  is  to  first  organize  the  owners 
into  the  corporate  form.  A  new  corporation  is  then  organized,  which 
instead  of  purchasing  the  properties  buys  the  entire  stock,  or  at  least 
a  majority  interest  in  the  separate  companies.  The  separate  corpora- 
tions maintain  their  existence,  and  their  dividends  make  up  the  fund 
from  which  the  dividends  of  the  new  corporation  are  declared.  In 
effect,  this  form  of  corporation  is  substantially  the  same  as  the  old 
trust,  but  the  corporation  is  organized  regularly  under  the  laws  of 
some  state,  and  is  subject  to  whatever  restrictions  the  laws  of  that 
state  place  upon  it,  instead  of  being  an  irresponsible  body,  as  the 
trust  was.  This  plan  of  organization  has  been  followed  by  the 
Federal  Steel  Company,  by  the  latest  reorganization  of  the  Distilling 


MODERN  CAPITALISTIC  ORGANIZATION  303 

Company  of  America,  by  the  United  States  Steel  Corporation, 
and  others. 

In  the  management  of  this  form  of  combination  the  officers  and 
directors  of  the  central  company  legally  appear  only  as  a  board  of 
stockholders.  They  cannot,  ex  officio,  direct  the  action  of  the  officers 
of  the  constituent  companies;  they  can  merely  give  advice.  But  as 
they  have  the  power  of  electing  the  officers,  eventually  their  advice 
must  be  followed. 

This  form,  in  which  the  central  corporation  owns  the  stock  instead 
of  the  properties  of  the  separate  companies,  has  a  flexibility  and  con- 
venience in  organization  and  in  retaining  local  brands,  good- will,  etc., 
not  found  in  corporations  owning  the  plants. 

It  will  be  noted  that  pools,  agreements  on  prices,  etc.,  leave  the 
constituent  companies  each  independent  and  with  diverse  interests, 
whereas  the  trust  and  the  combination,  under  the  two  kinds  of  cor- 
porations mentioned,  secure  an  identity  of  interests  among  the  sepa- 
rate establishments;  if  one  is  weak  it  is  for  the  interest  of  all  that  it 
be  made  strong  or  put  out  of  existence.  The  control  is  much  more 
complete. 

v.    THE   FACTOR   SYSTEM 

Several  of  the  industrial  combinations  have  adopted  the  plan  of 
selling  their  goods  to  t"he  wholesalers  at  a  certain  fixed  price  and  at 
the  same  time  naming  a  price  at  which  they  were  to  furnish  them  to 
the  retailers.  After  an  interval  of  from  thirty  days  to  six  months, 
provided  the  wholesaler  would  make  affidavit  that  he  had  maintained 
the  prices  given  him,  and,  sometimes,  that  he  had  sold  only  the  goods 
of  the  combination,  he  would  receive  a  rebate  from  the  manufacturer. 
From  this  rebate  came  his  only  profits.  It  has  been  thought  by  many 
that  this  factor  system  was  a  means  employed  by  the  combination  to 
hold  its  monopolistic  control  over  the  wholesaler. 

This  system  is  perhaps  best  known  in  connection  with  rebates  on 
sugar,  but  for  a  time,  while  the  Distilling  and  Cattle  Feeding  Com- 
pany was  in  existence,  a  somewhat  similar  rebate  system  was  employed 
in  the  sale  of  spirits.  The  larger  distributers  and  rectifiers  received 
a  rebate  of  2  cents  a  gallon,  and  the  wholesalers,  after  an  interval, 
provided  they  had  sold  only  the  goods  of  the  company,  received  a 
rebate  of  usually  5  cents  a  gallon,  though  the  amount  of  the  rebate 
varied  somewhat  at  dififerent  times. 

In  the  case  of  the  whisky  combination  the  company  failed  to  keep 
on  hand  a  sufficient  amount  of  cash  to  pay  these  rebates  promptly, 


304  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  this  delay  in  payment  was  one  of  the  causes  which  led  to  throwing 
this  company  into  the  hands  of  a  receiver. 

A  similar  system  is  found  in  the  selling  of  soap,  baking  powders, 
etc.,  but  the  general  principles  vary  in  no  essential  particulars  from 
the  ones  just  given. 

85.    THE  STEEL  RAIL  POOL  OF  1887' 

MEMORANDUM  OF  AGREEMENT,  ENTERED  INTO  AUGUST  2,  1 887,  BY 
AND  BETWEEN  THE  NORTH  CHICAGO  ROLLING  MILL  COMPANY,  THE 
CAMBRIA  IRON  COMPANY,  THE  PENNSYLVANIA  STEEL  COMPANY, 
THE  UNION  STEEL  COMPANY,  THE  LACKAWANNA  IRON  &  COAL 
COMPANY,  THE  JOLIET  STEEL  COMPANY,  THE  WESTERN  STEEL 
COMPANY,  THE  CLEVELAND  ROLLING  MILL  COMPANY,  CARNEGIE 
BROTHERS  &  CO.,  LIMITED;  CARNEGIE,  PHIPPS  &  CO.,  LIMITED; 
THE  BETHLEHEM  IRON  COMPANY,  THE  SCRANTON  STEEL  COMPANY, 
THE  TROY  STEEL  &  IRON  COMPANY,  THE  WORCESTER  STEEL  WORKS, 
AND  THE  SPRINGFIELD  IRON  COMPANY. 

We,  the  before-named  companies  and  corporations,  manufac- 
turers of  steel  rails,  hereby  mutually  agree  one  with  the  other,  that 
we  will  restrict  our  sales  and  the  product  of  steel  rails  of  50  pounds  to 
the  yard  and  upward,  applying  to  orders  taken  by  us  and  to  be  deUv- 
ered  by  us  from  our  respective  works  during  the  year  1S88,  as  herein- 
after allotted  and  limited ;  and  we  respectively  bind  ourselves  not  to 
sell  in  excess  of  our  current  allotments,  without  first  obtaining  the  con- 
sent of  the  Board  of  Control  thereto — that  is  to  say: 

It  is  agreed,  there  shall  now  be  made  an  allotment  of  800,000 
tons  of  rails,  which  shall  be  divided  and  apportioned  to  and  among  the 
several  parties  hereto  to  be  sold  by  them  during  the  year  188S,  upon 
the  following  basis  of  percentages,  to  wit:  North  Chicago  Rolling  Mill 
Company,  12I  per  cent;  Pennsylvania  Steel  Company,  9/0  per  cent; 
Bethlehem  Iron  Company,  9  per  cent;  Carnegie  Bros.  &  Co.,  Limited, 
and  Carnegie,  Phipps  &  Co.,  Limited  (jointly),  13 ^^j^  per  cent;  Joliet 
Steel  Company,  8  per  cent;  Lackawanna  Iron  &  Coal  Company,  8 
per  cent;  Cambria  Iron  Company,  8  per  cent;  Scran  ton  Steel  Com- 
pany, 8  per  cent;   the  Union  Steel  Company,  8  per  cent;   Cleveland 

'  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
Part  I  (191 1),  pp.  69-71. 

(For  an  account  of  another  form  of  monopolistic  agreement  see  Selection  12.. 
on  Coffee  Valorization. — Editors.) 


MODERN  CAPITALISTIC  ORGANIZATION  305 

Rolling  Mill  Company,  4^^  per  cent;  Troy  Steel  &  Iron  Company, 
4-['V  per  cent;  Western  Steel  Company,  4^  per  cent;  Worcester  Steel 
Works,  i^  per  cent. 

And  in  addition  to  the  said  allotment  of  800,000  tons  of  rails  above 
allotted,  an  additional  allotment  of  250,000  tons  is  hereby  made 
and  allotted  to  the  Board  of  Control,  to  be  reallotted  and  reappor- 
tioned by  it,  as  and  to  whom  it  may  deem  equitable,  in  the  adjustment 
of  any  differences  that  may  arise.  It  being  also  further  agreed  that  all 
subsequent  allotments  of  rails  hereafter  made,  to  be  sold  under  this 
agreement  during  the  year  1888,  shall  also  be  divided  and  apportioned 
to  the  several  parties  hereto  in  the  same  ratio  of  percentages  as  said 
apportionment  of  800,000  tons  is  herein  divided  and  apportioned. 

It  is  further  agreed,  that  the  Board  of  Control  shall,  from  time  to 
time,  make  such  further  allotments  as  shall  be  necessary  to  at  all 
times  keep  the  unsold  allotments  at  least  200,000  tons  in  excess  of  the 
total  current  sales,  as  shown  by  the  monthly  reports  of  sales.  This 
is  to  be  in  addition  to  the  then  unappropriated  part  of  the  250,000 
tons  hereinbefore  allotted  to  the  Board  of  Control  to  adjust  differences. 

It  is  further  agreed,  on  the  first  day  of  April,  July,  and  October, 
the  Board  of  Control  are  authorized  and  directed  to  cancel  such  part 
of  the  unmade  allotments  of  the  respective  parties  hereto  as  they,  the 
said  Board  of  Control  shall  determine  such  party  unable  to  make  in 
due  time,  and  all  allotments  so  cancelled  the  Board  of  Control  shall 
have  the  right  to  reallot  to  any  of  the  other  parties  hereto;  it  being 
understood  that  all  such  cancellations  shall  apply  only  to  allotments 
standing  to  the  credit  of  the  respective  parties  hereto  on  the  dates 
above  named,  but  no  reallotment  as  aforesaid  shall  be  made  by  the 
Board  of  Control  to  any  of  the  parties  hereto  for  the  purpose  of 
enabling  them,  or  any  of  them,  to  make  and  sell  rails  from  foreign 
made  blooms. 

It  is  further  agreed,  that  all  transfers  of  parts  of  allotments 
from  one  party  to  another  shall  be  made  by  the  Board  of  Control. 

It  is  further  agreed,  that  there  shall  be  a  Board  of  Control,  con- 
sisting of  three  members,  namely,  Orrin  W.  Potter,  Luther  S.  Bent, 
and  W.  W.  Thurston,  who  shall  have  power  to  employ  a  paid  secre- 
tary and  treasurer. 

It  is  further  agreed,  that  the  Board  of  Control,  upon  the  written 
consent  of  75  per  cent  of  the  percentages  as  hereinbefore  named, 
shall  increase  the  allotments  for  the  year  1888,  and  such  increase 
shall  be  allotted  to  the  parties  hereto  as  hereinbefore  pro\'ided. 


3o6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

It  is  further  agreed,  that  each  party  whose  name  is  hereunto 
annexed,  shall  and  will  make  monthly  returns  to  the  Board  of  Control 
of  all  contracts  for  delivery  of  rails  of  50  pounds  to  the  yard  and  up- 
ward during  the  year  1888,  and  also  of  all  shipments  of  such  rails 
made  by  them  during  said  year;  a  copy  of  such  return  shall  be  fur- 
nished to  each  party  hereto. 

It  is  further  agreed,  that  all  the  parties  hereto  shall  and  will,  on 
or  before  January  15,  1888,  make  a  written  return  to  the  Board  of 
Control  of  all  rails  of  50  pounds  to  the  yard  and  upward  (designating 
the  weight)  which  they  respectively  had  on  hand  January  i,  1888, 
stating  whether  the  same  are  sold,  and  if  sold,  on  what  order  they 
apply. 

It  is  further  agreed,  that  the  Board  of  Control  shall  have  the  right 
whenever  they  deem  it  expedient  to  convene  a  meeting  of  the  parties 
hereto,  and  they  shall  give  at  least  ten  day's  previous  notice  of  all 
meetings,  and  any  business  transacted  at  such  meetings,  and  receiv- 
ing 75  per  cent  of  the  votes  present  thereat,  either  in  person  or  by 
proxy,  shall  be  binding  on  all  the  parties  hereto,  except  as  to  a  change 
in  percentages  as  aforesaid. 

The  Board  of  Control  shall  be  required  to  call  a  meeting  of  the 
parties  hereto  when  requested  so  to  do  in  writing,  sign^  by  any  three 
of  the  contracting  parties,  but  such  request  and  such  notice  shall 
state  the  object  for  which  such  meeting  is  called. 

It  shall  be  the  duty  of  the  Board  of  Control  to  have  a  proper 
record  kept  of  all  the  returns  made  to  it,  with  power  from  time  to  time 
to  change  the  form  of  return  as  they  may  deem  expedient. 

The  Board  of  Control  shall  have  authority  to  levy  an  assessment, 
pro  rata  to  the  allotted  tonnage,  to  defray  the  actual  expenses  made 
necessary  to  carry  out  this  agreement. 

It  is  further  agreed,  that  we  will,  respectively,  immediately  make 
return  to  the  Board  of  Control  of  all  rails  of  50  pounds  to  the  yard 
and  upward  which  we  are  now  under  contract  to  deliver  during  the 
year  1888,  said  return  to  state  to  whom  such  rails  are  sold  and  when 
they  are  to  be  delivered. 

[Signatures] 


MODERN  CAPITALISTIC  ORGANIZATION  307 

86.    THE  CONTINENTAL  WALL  PAPER  COMPANY* 

The  contract  and  agreement  is  one  between  98  per  cent  of  all  the 
wall-paper  makers  in  the  United  States,  who  co-operate  through  a 
corporation  organized  by  them  for  the  single  purpose  of  selling  their 
gross  product.  That  there  shall  be  no  competition  between  the 
combined  companies  is  insured  by  the  agreement  that  each  manu- 
facturer shall  sell  his  entire  product  at  an  agreed  price  to  the  plaintiff 
corporation,  which  is  to  nominally  make  all  sales,  either  directly  or 
indirectly,  at  a  uniform  price,  subject  to  an  agreed  scale  of  discounts, 
varying  only  according  to  an  arbitrary  classification  of  buyers.  The 
difference  between  the  price  at  which  the  so-called  "vendors"  sell 
to  the  plaintiff  company  and  the  price  exacted  from  those  who  buy 
from  it  will  be  profit,  and  the  profits  will  constitute  the  dividends  to 
be  distributed  to  plaintiff's  shareholders,  and  plaintiff's  shareholders 
are  exclusively  composed  of  the  combining  companies,  called  "vend- 
ors"; its  comparatively  insignificant  amoimt  of  stock  being  placed 
with  these  vendors  in  proportion  to  the  product  of  the  year  before 
the  combine  took  effect.  To  prevent  the  enlargement  of  the  product 
of  any  one  of  the  vendors,  it  is  provided,  in  effect,  that  there  shall  be 
no  enlargement  of  plant,  though  new  machinery  may  be  used  to 
replace  old  or  that  destroyed. 

To  insure  a  monopoly  of  the  business  to  themselves,  and  keep 
strangers  out  of  it,  it  is  alleged,  and  not  denied,  that  the  only  two 
manufacturers  of  wall-paper  machinery  in  the  United  States  became 
parties  to  the  combination  by  agreeing  to  sell  no  machinery  to  stran- 
gers, and  to  confine  their  sales  to  the  combine.  To  add  to  the  pro- 
tective force  of  the  tariff  duties  tending  to  keep  out  foreign  products, 
it  is  also  averred  that  an  agreement  was  made  with  Canadian  paper 
makers  to  protect  each  other  against  any  cutting  of  prices.  To  insure 
against  any  kicking  out  of  the  agreement  or  violations  in  any  way, 
each  member  is  required  to  indorse  its  shares  in  the  Continental 
Wall  Paper  Company  to  that  corporation,  which  is  to  hold  and  apply 
the  same  as  liquidated  damages  in  case  of  any  breach.  But  that 
there  should  be  no  inducement  to  fly  the  contract,  the  scheme  con- 
templated that  every  wholesale  buyer  should  engage  himself  to  buy 
his  entire  supply  from  the  combine;  and  to  secure  the  engagement  of 
each  such  jobber  or  wholesaler  to  the  scheme,  no  paper  was  to  be 
sold  to  such  as  did  not  sign.    This  made  the  contract  practically 

•  From  the  Continental  Wall  Paper  Co.  (plaintiff)  v.  Lewis  Voighi  6*  Sons 
Co.,  148  Fed.  Rep.  946-4B. 


3o8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

unbreakable,  for  if  a  factory  should  weary  of  the  monopoly,  it  could 
find  no  jobbers  or  wholesalers  free  to  buy  its  product,  and  it  would  be 
driven  to  rely  upon  such  orders  as  it  could  get  from  retailers  or 
consumers.  That  this  imion  of  former  competitors — a  union  embra- 
cing substantially  all  of  the  wall-paper  mills  in  the  land  (for  the  2  per 
cent  left  out  may  be  ignored  as  an  active  competition),  should  result 
in  an  unreasonable  enhancement  of  prices  is  precisely  what  we  might 
anticipate.  Wall  paper  is  a  product  of  universal  necessity,  and  the 
consumers  are  found  in  every  household.  Every  principle  of  eco- 
nomic law  instructs  us  that  under  such  conditions  there  will  be  an 
enhancement  of  price,  limited  only  by  the  unknown  boundary  of 
human  greed  and  corporate  avarice.  It  is  therefore  not  to  be  doubted 
that  the  averment  confessed  by  the  pleading,  that  prices  have  been 
advanced  50  per  cent,  is  substantially  true.  The  conspiring  mills 
were  situated  in  many  states.  The  consumers  embraced  the  whole 
citizenship  of  the  United  States.  The  jobbers  and  wholesalers  who 
were  to  be  coerced  into  contracts  to  buy  their  entire  demands  from 
the  Continental  Wall  Paper  Company,  or  be  driven  out  of  business, 
were  in  every  state. 

Before  the  combination,  each  of  the  combining  companies  was 
engaged  in  both  state  and  interstate  commerce.  The  freedom  of 
each,  with  respect  to  prices  and  terms,  was  restrained  by  the  agree- 
ment and  interstate  commerce  directly  affected  thereby,  as  well  as 
by  the  enhancement  of  prices  which  resulted.  A  more  complete 
monopoly  in  an  article  of  universal  use  has  probably  never  been 
brought  about.  It  may  be  that  the  wit  of  man  may  yet  devise  a 
more  complete  scheme  to  accomplish  the  stifling  of  competition;  but 
none  of  the  shifts  resorted  to  for  suppressing  freedom  of  commerce 
and  securing  undue  prices,  shown  by  the  reported  cases,  is  half  so 
complete  in  its  details.  None  of  the  schemes  with  which  this  may 
be  compared  is  more  certain  in  its  results,  more  widespread  in  its 
operation,  and  more  evil  in  its  purposes. 

87.    THE  AMERICAN  TOBACCO  COMPANY' 

The  Tobacco  Combination  had  its  origin  in  1890  in  the  formation 
of  the  American  Tobacco  Company,  capitalized  at  $25,000,000, 
which  concern,  combined  the  five  leading  cigarette  manufacturers  of 
the  country  and  thus  obtained  control  over  about  90  per  cent  of  the 

'  Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco 
Industry,  Part  I  (1909),  pp.  1-13 


MODERN  CAPITALISTIC  ORGANIZATION  309 

country's  cigarette  output.  In  1891  it  extended  its  business  along 
other  lines  by  acquiring  two  important  smoking-tobacco  concerns 
and  by  entering  the  plug  and  cheroot  branches  of  the  business.  Its 
proportion  of  the  total  output  in  these,  however,  was  small  for  several 
years.  In  1895  several  "all-tobacco-cigarette"  concerns  came  imder 
its  control,  which  practically  established  its  supremacy  in  this  branch. 
From  1894  to  1897  the  company,  taking  aggressive  steps  to  control 
the  plug  business  of  the  country,  carried  on  its  so-called  "plug- 
tobacco  war."  This  resulted  late  in  1898  in  the  organization,  sub- 
stantially under  its  control,  of  the  Continental  Tobacco  Company 
with  $62,290,700  of  capital  stock,  almost  equally  divided  between 
preferred  and  common.  The  Continental  took  over  the  plug  busi- 
nesses of  a  number  of  leading  independent  interests  and  also  that  of 
the  American  itself.  Early  in  1899,  moreover,  the  Continental 
acquired  the  Liggett  &  Myers  Tobacco  Company,  the  largest  and  most 
important  plug-tobacco  concern  of  the  country,  increasing  its  own 
outstanding  capital  stock  at  this  time  to  $97,690,700.  The  Conti- 
nental, by  these  and  subsequent  acquisitions,  secured  substantial 
control  of  the  plug-tobacco  business  of  the  country. 

Meantime  the  American  Tobacco  Company  made  numerous  acqui- 
sitions of  smoking-tobacco  concerns,  and  by  the  end  of  1899  it  had 
almost  as  large  a  degree  of  control  over  this  branch  as  the  Continental 
Tobacco  Company  had  acquired  over  the  plug  branch.  The  out- 
standing capitalization  of  the  American  was  raised  in  this  year  from 
$35,000,000  to  $68,500,000. 

In  1 90 1  the  power  of  the  Combination  was  further  greatly 
increased  by  the  organization  of  the  Consolidated  Tobacco  Company, 
a  holding  concern  with  a  capitalization  of  $30,000,000,  later  increased 
to  $40,000,000,  all  paid  in  in  cash.  The  Consolidated  was  the  means 
of  concentrating  control  within  the  Combination.  It  acquired  prac- 
tically all  of  the  common  stock  of  the  American  and  Continental 
companies,  issuing  in  exchange  therefor  $157,378,200  of  4  per  cent 
bonds.  The  organization  of  this  company  was  planned  by  leading 
interests  in  the  two  older  companies.  The  stockholders  were  induced 
to  exchange  their  common  stock  for  bonds  bearing  a  fixed  rate  of 
interest.  As  a  result  the  greatly  increased  profits  in  the  business 
from  the  reduction  in  the  internal-revenue  tax  soon  afterward,  which 
increase  stockholders  generally  could  not  foresee,  accrued  in  large  part 
to  the  advantage  of  these  inside  interests  as  the  chief  holders  of  the 
Consolidated's  stock. 


310  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

During  the  years  1900,  1901,  and  1902  the  Combination  rapidly 
extended  its  operations.  In  the  first  year  the  American  Snuff  Com- 
pany was  formed  with  a  capitaHzation  of  $23,001,700.  It  combined 
the  businesses  of  the  Atlantic  Snuff  Company  and  of  the  G.  W.  Helme 
Company  with  the  snuff  business  of  the  American,  Continental,  and 
Lorillard  companies,  these  three  groups  together  representing  at  that 
time  about  60  per  cent  of  the  snuff  business  of  the  country.  In  1901 
the  American  Cigar  Company  was  formed  with  a  capital  stock  of 
$10,000,000  (authorized;  $9,965,000  issued),  subsequently  increased 
to  $20,000,000,  all  outstanding.  This  company  acquired  several 
important  cigar  concerns  and  combined  them  with  the  cigar  business 
of  the  American  Tobacco  Company.  Through  the  Havana  Tobacco 
Company  the  Combination  in  1902  acquired  control  of  the  larger 
part  of  the  Cuban  cigar  and  cigarette  business.  A  campaign  for  the 
control  of  the  tobacco  business  of  Great  Britain  by  the  Combination, 
begun  in  1901,  but  only  partially  successful,  led  in  1902  to  the 
formation  of  the  British-American  Tobacco  Company,  which  concern 
now  handles  the  export  and  foreign  business  of  the  Combination. 
Two-thirds  of  the  total  outstanding  capitalization  of  this  concern, 
£5,820,000  ($28,323,000),  is  owned  by  the  American  Combination 
and  the  remaining  third  by  a  British  combination,  the  Imperial 
Tobacco  Company,  formed  as  a  result  of  the  American  invasion. 

In  1904  the  American,  Continental,  and  Consolidated  companies 
were  merged  into  the  present  American  Tobacco  Company,  the 
central  concern  of  the  Combination.  For  the  preferred  stock  of 
the  old  American  and  Continental  companies,  outstanding  and  in 
the  hands  of  the  public,  it  issued  bonds  on  such  a  basis  as  to  make  the 
return  to  the  holders  the  same  as  before.  For  the  bonds  of  the  Con- 
solidated Tobacco  Company,  aggregating  over  $157,000,000,  it 
issued  preferred  stock  and  4  per  cent  bonds,  and  for  the  stock  of  the 
Consolidated  Tobacco  Company  it  exchanged  common  stock  at 
par.  The  amounts  of  securities  outstanding  at  the  end  of  1904 
were  $40,242,400  common  stock,  $78,689,100  preferred  stock,  and 
$136,360,600  bonds,  a  total  of  $255,292,100;  this  was  decreased  to 
$226,764,600  at  the  close  of  1908  through  redemption  of  a  portion  of 
the  bonds.  Control  of  the  American  Tobacco  Company  is  vested  in 
the  common  stock,  which,  as  shown  above,  forms  only  about  one-sixth 
of  the  entire  capitalization,  but  which  in  recent  years  (1908-19 10) 
has  received  nearly  one-half  the  entire  earnings  as  dividends. 

The  reorganized  American  Tobacco  Company  is  both  a  manu- 


MODERN  CAPITALISTIC  ORGANIZATION  311 

facturing  and  a  holding  company.  It  produces  directly  the  larger 
part  of  the  Combination's  plug  and  smoking  tobacco  and  domestic 
cigarettes.  It  controls  a  large  number  of  subsidiary  concerns, 
however,  engaged  in  the  same  branches  of  the  business,  as  well  as  the 
American  Snuff  Company  and  the  American  Cigar  Company,  which 
conduct,  respectively,  the  snuflf  and  cigar  branches  of  the  Com- 
bination's business. 

As  a  result  of  the  consolidations  and  acquisitions  that  have  taken 
place,  the  American  Tobacco  Company,  either  directly  or  through 
its  subsidiaries,  controlled  at  the  close  of  1908  roughly  from  75  to  85 
per  cent  of  practically  every  branch  of  the  domestic  business  in  which 
it  is  interested,  with  the  exception  of  cigars,  in  which  its  share  was 
only  about  13  per  cent.  In  the  case  of  snuff  its  proportion  of  the 
total  was  95 . 7  per  cent. 

The  history  of  the  Tobacco  Combination  thus  presented  shows 
plainly  that  the  leading  purpose  of  the  men  who  have  controlled  it 
has  been  to  dominate  the  tobacco  industry.  They  started  out  by  prac- 
tically monopolizing  the  cigarette  business.  With  the  great  profits 
derived  from  that  source  they  carried  on  a  strenuous  competitive 
fight  in  the  plug  industry,  which  ultimately  forced  the  leading  com- 
peting manufacturers  into  combination  with  themselves.  This 
secured  for  the  Combination  a  dominant  position  in  the  manufacture, 
not  only  of  plug,  but  of  smoking  tobacco.  Soon  after,  the  combination 
in  the  snuff  industry  was  brought  about,  and  subsequently  a,  combina- 
tion in  the  cigar  industry.  The  latter,  however,  controls  only  a 
limited  proportion  of  the  business. 

The  successive  combinations  which  these  men  have  established, 
except  that  in  the  cigar  business,  at  the  outset  took  in  the  leading  manu- 
facturers and  secured  a  very  large  degree  of  control  over  the  business. 
That  degree  of  control,  however,  has  been  further  extended  by  the  ac- 
quisition, either  by  direct  purchase  or  by  securing  a  controlling  stock 
interest,  of  a  very  large  number  of  other  competing  concerns.  The 
total  number  of  formerly  separate  concerns  and  combinations  which 
have  passed  under  the  control  of  the  Tobacco  Combination  is  in  the 
neighborhood  of  2  50.  This  nimiber  includes  the  concerns  which  origin- 
ally entered  the  several  combinations,  but  such  original  acquisitions, 
though  in  general  they  were  the  largest  concerns,  were  much  less  numer- 
ous than  the  concerns  acquired  subsequent  to  the  formation  of  the  com- 
binations. It  appears  to  have  been  the  policy  in  fact  to  buy  up,  from 
time  to  time,  most  competitors  whose  business  had  become  successful. 


312  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  effect  of  these  later  acquisitions  is  best  seen  in  the  increase  in 
the  proportion  of  the  business  controlled.  In  1900,  shortly  after  the 
formation  of  the  Continental  Tobacco  Company,  the  Tobacco  Com- 
bination controlled  about  60  per  cent  of  the  production  of  chewing 
and  smoking  tobacco  in  the  United  States.  In  1906  it  controlled 
81 .8  per  cent  of  the  chewing  tobacco  and  70.6  per  cent  of  the  smok- 
ing tobacco.  Its  proportion  of  the  manufacture  of  snuff  increased 
from  80. 2  per  cent  in  1901,  the  first  full  year  of  the  operation  of  the 
American  Snuff  Company,  to  96  per  cent  in  1906. 

A  significant  feature  of  many  of  the  acquisitions  of  the  Combi- 
nation, particularly  during  the  period  from  1902  to  1904,  is  the 
fact  that  they  were  made  secretly  and  that  the  American  Tobacco 
Company  interests,  as  long  as  possible,  concealed  their  control, 
continuing  to  operate  the  concerns  as  though  independent  and  often 
using  them  as  a  special  instrument  for  attacking  the  business  of 
genuine  competitors. 

Aside  from  concerns  engaged  in  tobacco  manufacture,  the  Ameri- 
can Tobacco  Company,  and  to  a  less  extent  the  other  affiliated 
combinations,  have,  particularly  since  1899,  acquired  control  of 
many  concerns  engaged  in  enterprises  contributory  to  tobacco  manu- 
facture. Concerns  thus  brought  under  the  control  of  the  Combination 
include  many  engaged  in  the  wholesale  or  retail  distribution  of 
tobacco  products,  several  producing  leaf  tobacco  in  Cuba  and  Porto 
Rico,  a  number  which  make  packages  and  materials,  other  than 
tobacco,  used  in  tobacco  manufacture,  several  which  exploit  patents 
for  machinery  or  manufacture  machinery  for  the  use  of  tobacco 
factories,  and  a  few  which  handle  by-products,  make  smokers'  supplies, 
etc.  The  most  important  of  these  contributory  enterprises  of  which 
the  Combination  has  secured  control  is  the  manufacture  of  licorice 
which  is  a  very  important  material  in  tobacco  manufacture.  Through 
the  MacAndrews  &  Forbes  Company,  which  has  bought  up  several 
competing  concerns,  the  American  Tobacco  Company  interests  have 
substantially  a  complete  monopoly  of  the  licorice  business.' 

'  [A  suit  to  dissolve  the  American  Tobacco  Company  was  started  by  the  United 
States  government  and  in  191 1  the  Supreme  Court  decided  in  the  government's 
favor.  It  declared  that  the  company  was  unreasonably  restraining  interstate 
commerce,  contrary  to  the  Anti-Trust  Law,  and  decreed  its  dissolution.  Since 
then  the  trust  has  been  split  up  into  parts  and  each  of  the  various  branches  of  the 
business  distributed  to  two  or  more  separate  companies  which  are  enjoined  fiom 
combining  to  restrain  interstate  commerce. — Editors.) 


MODERN  CAPITALISTIC  ORGANIZATION  313 

88.    THE  UNITED  STATES  STEEL  CORPORATION^ 

The  basic  industry  of  steel  making  aflfects  the  whole  people  of  the 
United  States.  Its  organization  is  a  matter  of  public  concern  (not 
merely  of  private  interest),  and  a  great  national  resource — iron  ore — 
lies  at  the  foundation  of  the  business.  The  Steel  Corporation  was  the 
culmination  and  the  result  of  a  remarkable  and  even  dramatic  period 
in  the  steel  industry.  Until  about  1898  the  bulk  of  the  business 
was  distributed  among  a  very  considerable  number  of  concerns. 
There  was  sharp  competition,  modified  by  frequent  pools  and  price 
agreements  of  greater  or  less  duration  and  effectiveness. 

*In  1898  began  an  era  of  great  consolidations,  with  capitalizations 
ranging  from  $30,000,000  to  $100,000,000,  usually  mergers  of  many 
smaller  companies.  In  most  of  these,  as  in  the  earlier  price  agree- 
ments, the  ruling  motive  was  the  removal  of  competition. 

They  did  not,  however,  finally  eliminate  competition.  On  the  con- 
trary, a  broad  movement  at  once  became  apparent  which  threatened 
competition  on  a  larger  scale  and  probably  more  severe  than  any  in 
steel  history.    This  was  the  process  known  as  "integration," 

The  situation  in  1 899-1 900  was  as  follows:  There  were  three  great 
companies — the  Carnegie  company,  the  Federal  Steel,  and  the 
National  Steel — dominating  the  production  of  crude  and  semifinished 
steel.  This  may  be  called  the  "primary"  group.  Six  other  large 
concerns — the  American  Steel  and  Wire,  American  Tin  Plate,  Ameri- 
can Steel  Hoop,  American  Sheet  Steel,  National  Tube,  and  American 
Bridge — severally  controlled  these  lighter  finished  products.  These 
formed  the  "secondary"  group. 

But,  large  as  these  concerns  were,  no  one  of  them  was  entirely 
self-sufficient.  The  "secondary"  group  was  dependent  on  the 
"  primary  "  for  its  crude  steel;  the  "primary  "  largely  dependent  on  the 
"secondary"  for  a  market  for  its  products.  Few  were  completely 
"integrated";  that  is, few  carried  through  under  one  control,  with  the 
accompanying  advantages,  the  entire  industrial  process  from  the  ore 
to  the  finished  product,  linking  up  ore  and  coal  mines,  transportation, 
blast  furnaces,  steel  works,  rolling  mills,  and  finished  manufacture. 

Immediately,  however,  came  the  next  step.  These  great  con- 
cerns almost  simultaneously  began  the  final  linking  up  of  the  chain  of 
production.  Once  begun  by  one  concern,  others  followed  in  self- 
defense.    The  "  secondary  "  companies  began  to  reach  back,  acquiring 

'  Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  the  Steel 
Industry,  Part  T  (191 1),  pp.  xvii-xxiv. 


314  MATERL\LS  FOR  ELEMENTARY  ECONOMICS 

ore  reserves  and  crude  steel  plants.  For  example,  in  1900  the  Steel 
and  Wire  Company,  whose  supply  of  materials  had  previously  been 
purchased  mainly  from  the  Carnegie  or  the  Federal  company,  planned 
to  make  its  own  steel;  likewise  the  National  Tube  Company.  The 
"l)rimary"  concerns,  finding  these  their  chief  customers  turning  into 
rivals,  retaliated  by  reaching  forward  to  the  manufacture  of  finished 
products. 

Paramount  in  importance  was  the  ore.  The  recognition  of  that 
importance  came  strangely  late,  but,  once  recognized,  it  became  an 
axiom  that  no  large  concern  could  stay  in  the  business  unless  fortified 
by  its  own  ore  reserves.  By  1900  the  bulk  of  the  lake  ores  was  in -the 
hands  of  less  than  a  dozen  companies,  with  a  similar  concentration 
in  coking  coal. 

Such  efforts  on  the  part  of  these  great  concerns,  in  striving  each 
to  "integrate,"  to  make  itself  wholly  independent,  threatened  to 
result  in  a  great  and  sudden  increase  and  duplication  of  the  steel  pro- 
ducing and  finishing  capacity  of  the  country,  and  to  involve  them 
also  in  an  invasion  of  each  other's  business. 

Thus  there  was  suddenly  revealed  to  the  industry  what  the  trade 
press  at  the  time  called  "the  impending  struggle  of  the  giants,"  a  con- 
test between  great  concerns  who  under  such  circimistances  might  be 
forced  to  work  out,  in  rigorous  competition,  the  survival  of  the  fittest. 

Such  were  the  conditions  in  the  steel  industry  in  1900.  The 
spark  that  lighted  the  train  was  the  threat  of  the  Carnegie  company  to 
erect  a  great  tube  plant  near  Cleveland,  thus  invading  the  field  of 
finished  manufacture. 

Steel  men  and  the  various  associated  financial  interests  regarded 
this  situation  with  much  alarm.  In  such:  competition  they  saw  a 
great  danger  to  their  businesses,  especially  to  the  profitable  quasi- 
monopolies  in  certain  branches  of  the  trade.  In  avertmg  it  they  also 
saw  a  great  opportunity.  The  extraordinary  era  of  industrial  expan- 
sion was  still  on;  the  public  were  still  eagerly  absorbing  large  issues  of 
securities.  By  merging  these  conflicting  interests  into  a  great  corpora- 
tion, the  threatened  "steel  war"  would  be  averted,  and  great  profits 
realized  from  the  flotation  of  securities. 

With  amazing  swiftness,  in  a  few  weeks,  the  United  States  Steel 
Corporation  was  thus  organized,  and  began  business  on  April  i,  1901. 
Its  total  capitalization  was  a  little  over  $1,402,000,000  (including 
bonds).  It  is  strictly  a  "holding"  company — that  is,  it  does  not 
mine,  manufacture,  transport,  or  sell;  it  simply  owns  the  stock  (as  a 


MODERN  CAPITALISTIC  ORGANIZATION  315 

rule  all  the  stock)  of  its  constituent  concerns.  Thus  competition 
between  these  concerns  was  eliminated,  while  enormous  profits  were 
made  from  the  flotation  of  securities,  with,  also,  an  unparalleled 
stock  commission  to  the  underwriting  syndicate,  which  netted  a 
clear  profit  of  about  $62,500,000  in  cash. 

At  its  formation  the  United  States  Steel  Corporation  (referred  to 
herein  as  the  "Corporation")  controlled  about  two- thirds  of  the 
coimtry's  production  of  crude  steel,  and  from  one-half  to  four-fifths  of 
the  principal  rolled  steel  products.  It  comprised  ore,  coal,  limestone, 
natural  gas,  railway  and  steamship  companies,  blast  furnaces,  steel 
works,  rolling  mills,  finishing  plants,  and  various  other  properties.  It 
was  thus  a  thoroughly  integrated  concern,  from  ore  to  finished  products. 

There  remained  outside  the  merger  a  nimiber  of  great  companies  of 
the  primary  sort,  such  as  Jones  &  Laughlin,  the  Pennsylvania,  Cam- 
bria, Lackawanna,  Republic,  and  Colorado  Fuel  and  Iron  companies, 
and  numerous  concerns  of  the  secondary  type.  While  overshadowed 
by  the  Steel  Corporation,  these  included  strong,  efiScient,  and  growing 
businesses,  furnishing  a  basis  for  vigorous  competition. 

The  Steel  Corporation  is  the  greatest  industrial  concern  in  the 
United  States,  with  the  largest  properties,  and  of  international  impor- 
tance. It  is  the  most  conspicuous  example  of  the  modem  corporate 
organization  of  great  businesses.  As  such,  the  relation  of  its  invest- 
ment to  its  capitalization  and  to  its  earning  power  are  matters  of 
public  concern. 

The  corporation  was  organized  with  (in  round  numbers)  510 
millions  of  preferred  stock;  508  millions  of  common  stock;  303 
millions  of  corporation  bonds,  and  about  81  millions  of  underlying 
and  miscellaneous  obligations;  a  total  of  over  1,402  million  dollars. 

Speaking  broadly,  such  capitahzation  amoimted  to  the  claim, 
the  representation,  that  there  was  a  value  in  this  concern  which 
would  justify  a  fair  business  return  on  this  capitalization.  The 
Bureau  finds,  on  the  contrary,  that  in  1901  the  fair  market  value  of  its 
tangible  property  was  about  700  milUon  dollars,  slightly  less  than  one- 
half  its  capitahzation.  The  other  half,  the  excess  of  about  700  million 
dollars,  is  thus  separated  and  stands  out,  embodying  the  essential 
public  questions  raised  by  the  Biu-eau's  analysis  of  its  investment. 
In  so  far  as  that  excess  represented  value  in  1901,  it  was  value  due 
either  to  increased  earning  power  from  elimination  of  competition; 
concentrated  ownership  of  the  basic  natural  resources,  iron  ore,  and 
coal;  or,  in  some  degree,  integration  efficiency. 


3l6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

When  such  values  are  capitalized  into  dividend  or  interest  bearing 
securities,  they  involve  important  public  problems.  They  are  merely 
another  name  for  price  policy,  and  the  whole  public  is  ultimately 
concerned  in  steel  prices. 

Increases  in  property. — Since  its  formation,  the  corporation,  from 
surplus  earnings  (allowing  for  depreciation  and  changes  in  securities), 
has  made  good  much  of  the  original  excess  of  its  capitalization  over 
tangible  property.  That  excess  in  1901  was  about  700  million  dollars, 
or  100  per  cent,  and  in  1910  only  about  280  million  dollars,  or  24  per 
cent.  The  total  tangible  value  in  1910  was  1,187  million  dollars. 
As  in  1901,  there  is  omitted  here  all  the  merger  values  heretofore 
referred  to,  and  all  appreciation  of  natural  resources  above  the 
actual  cost  thereof  to  the  corporation. 

Profits. — The  rate  of  profit  has  been  calculated,  not  on  the  corpora- 
tion's capitjJ  stock,  but  on  the  total  investment  as  computed  by  the 
Bureau.  Operating,  administrative,  and  general  expenses,  as  well  as 
taxes,  have  been  deducted  from  earnings;  also  true  depreciation,  a 
matter  of  some  intricacy.  The  corporation's  allowance  for  deprecia- 
tion, including  mineral  exhaustion  and  obsolescence,  has  exceeded  a 
necessary  allowance.  The  Bureau  has  carefully  determined  from  the 
records  of  the  corporation  the  proper  depreciation,  and  has  restored 
the  excess  to  profits. 

Thus  arrived  at,  the  average  rate  of  profit  on  actual  investment 
from  April  i,  igoi,  to  December  31,  1910,  was  12  per  cent.  It  was 
highest  in  1902,  15.9  per  cent,  and  lowest  in  1904,  7.6  per  cent. 
The  yearly  rates  do  not  indicate  any  pronounced  tendency,  but  have 
on  the  whole  slightly  decreased. 

It  must  be  remembered,  however,  that  12  per  cent  profit  for  one 
small  concern  out  of  many  is  one  thing.  Other  concerns  may  make 
much  less.  It  is  a  very  different  thing  when,  as  in  this  case,  one-hall 
of  the  whole  industry  has  been  maintained  on  the  level  of  a  12  per 
cent  profit. 

It  must  be  made  entirely  clear  that  this  12  per  cent  is  the  rate  of 
profit  on  the  whole  investment.  Were  that  part  of  the  investment 
deducted  which  may  be  said  to  be  borrowed  money,  chargeable  only 
with  a  low  fixed  rate  of  return,  the  rate  on  the  remainder,  on  that 
part  which  may  be  considered  as  put  in  by  the  stockholders,  would 
be  considerably  higher. 

Position  in  the  industry. — While  in  production  the  Steel  Corpora- 
tion from  the  beginning  has  overshadowed  its  principal  rivals,  and 


MODERN  CAPITALISTIC  ORGANIZATION  317 

even  exceeded  all  of  its  competitors  combined,  its  proportion  of  the 
total  has  materially  diminished  in  the  ten  years  of  its  operation. 

In  pig-iron  production,  the  corporation  has  Just  about  maintained 
its  original  position;  in  1901,  43.2  per  cent;  in  1910,  43.4  per  cent. 
But  in  steel,  both  crude  and  finished,  it  has  lost  ground;  in  1901,  66 
per  cent  of  the  steel  ingots  and  castings;  in  1910,  only  54  per  cent, 
notwithstanding  great  additions  to  its  capacity.  Rolled  steel  products 
generally  show  an  almost  steady  loss,  especially  structural  shapes 
and  tin  plate.    Even  in  rails  there  has  been  no  gain. 

In  short,  speaking  broadly,  as  against  60  per  cent  of  all  crude  and 
finished  steel  production  in  1901,  the  corporation  now  has  not  much 
over  50  per  cent,  indicating  conclusively  the  continuous  presence  of 
strong  and  increasing  independent  production.  The  competition  of 
these  independents  with  the  Steel  Corporation  so  far  as  prices  are 
concerned  has  been  modified  by  the  policy  of  "co-operation."  This 
will  be  discussed  in  a  later  part  of  the  report. 

In  eflSciency,  location  of  plant,  and  equipment — in  capacity  rather 
than  actual  production — the  corporation  is  materially  stronger  than 
the  foregoing  figures  indicate,  and  in  case  of  continued  trade  depres- 
sion this  strength  would  probably  show  itself  in  increased  control. 
In  ownership  of  railroads  for  handling  its  materials  it  stands  in  a  class 
by  itself.  It  has  a  strong  but  not  exceptional  position  in  water  trans- 
portation. Its  control  of  the  best  qualities  of  coking  coal  is  very  strong 
though  modified  of  late  by  new  processes  which  make  other  coal  more 
or  less  available  for  coking  purposes. 

Its  position  in  ore  reserves,  on  the  other  hand,  is  much  stronger  than 
in  any  other  factor  in  the  business.  It  is  almost  impossible,  and  would 
be  unwise,  to  attempt  any  quantitative  statement  of  its  proportion 
of  the  total  ore  of  the  coimtry;  but  of  the  lake  ores,  on  which  the  pres- 
ent steel  industry  is  based,  it  has  about  75  per  cent,  and  this  advantage 
is  materially  enhanced  by  its  extensive  control  of  the  rail  transporta- 
tion of  the  ore  from  the  mines  to  the  lakes.  The  so-called  Hill 
lease  made  by  the  corporation  in  1907,  with  an  imprecedentedly  high 
rate  of  royalty  and  other  onerous  conditions,  is  a  striking  instance 
of  the  policy  of  the  corporation  to  maintain  a  high  degree  of  control 
of  ore.    This  lease  covered  enormous  ore  holdings. 

There  is  much  significance,  also,  in  the  prevailing  custom  of 
leasing  ore  mines  under  royalty  instead  of  purchasing  outright.  This 
system  as  applied  in  the  lake  ore  region,  without  any  effective 
restrictions  as  to  size  of  holdings,  plainly  facilitates  concentration  of 


3i8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

ore  property,  as  it  greatly  reduces  the  investment  required  to  control 
large  bodies  of  ore.  It  has  unquestionably  had  a  large  influence  in 
producing  the  high  concentration  of  control  now  existing  in  lake 
ores,  as  well  as  elsewhere. 


89.    THE  STEEL  CORPORATION  UNDERWRITING 

AGREEMENT' 

EXHIBIT    I 

An  agreement,  made  this  first  day  of  March,  nineteen  hundred  and 
one,  by  and  between  United  States  Steel  Corporation,  a  corporation 
existing  under  the  laws  of  the  State  of  New  Jersey  (hereinafter  called 
the  "Steel  Company"),  party  of  the  first  part,  and  J.  P.  Morgan  &  Co., 
of  the  city  of  New  York,  acting  in  behalf  of  a  Syndicate,  party  of 
the  second  part: 

Whereas,  the  Steel  Company  has  been  organized  with  a  capital 
of  $3,000,  of  which  one-half  is  7  per  cent  cumulative  preferred  stock 
and  one-half  is  common  stock,  as  shown  by  the  certificate  of  incorpora- 
tion of  the  Steel  Company,  recorded  in  Hudson  County,  New  Jersey, 
on  the  25th  day  of  February,  1901,  which  capital  stock  is  to  be  in- 
creased as  hereinafter  provided;  and 

Whereas,  as  hereinafter  stated,  the  board  of  directors  of  the  Steel 
Company  deem  it  necessary  for  its  business  now  to  acquire  the  stocks 
and  bonds  of  certain  other  corporations  and  also  to  obtain  for  its 
corporate  purposes  a  certain  sum  in  cash;  and 

Whereas,  after  careful  investigation  and  appraisement,  the  board 
of  directors  of  the  Steel  Company  has  ascertained,  adjudged  and 
determined  that  the  value  of  such  bonds  and  stocks  now  so  to  be 
acquired  and  hereinafter  specified,  exclusive  of  such  cash  sum  (which 
cash  sum  is  to  be  received  and  treated  by  the  Steel  Company  as  sur- 
plus), is  equal  at  least  to  the  par  value  of  the  stock  of  the  Steel  Com- 
pany and  of  the  bonds  of  the  Steel  Company  to  be  issued  therefor; 
and 

Whereas,  the  board  of  directors  of  the  Steel  Company  consider 
that  such  bonds,  stocks,  and  cash  may  best  be  obtained  by  purchase, 
on  the  terms  hereinafter  stated,  from  the  Syndicate  represented  by 

'  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
Parti  (1911),  pp.  383-86. 

[For  a  discussion  of  the  profits  of  this  underwriting  operation  see  Selection 
335. — Editors.) 


MODERN  CAPITALISTIC  ORGANIZATION 


319 


Messrs.  J.  P.  Morgan  &  Co.,  party  of  the  second  part  hereto,  and 
managers  of  the  said  Syndicate;  and 

Whereas,  each  of  the  corporations,  the  capital  stock  of  which  it  is 
proposed  now  to  acquire  hereunder,  has  been  organized  and  now  is 
existing  under  the  laws  of  the  State  of  New  Jersey,  and  has  outstand- 
ing capital  stock  divided  into  shares  each  of  the  par  value  of  $100 
(excepting  the  Carnegie  Company,  of  which  the  capital  stock  is 
divided  into  shares  of  the  par  value  of  $1,000),  and  divided,  also,  into 
classes  as  next  hereinafter  stated,  the  said  corporations,  and  the  total 
outstanding  capital  stock  and  the  classes  thereof,  being  as  follows, 
to  wit: 


Total  Odtstandino  Capital  Stock 

Naue  of  Corporation 

Preferred 

Common 

American  Sheet  Steel  ComDanv 

$24,500,000 
14,000,000 
40,000,000 
18,325,000 

$24,';  00,000 

Ameriran  Steel  Hood  Comoanv 

19,000,000 

Ampnran  Steel  and  Wire  ComDanv 

50,000,000 
28,000,000 

American  Tin  Plate  Company 

Carnefirie  Comoanv 

160,000,000 

Federal  Steel  Comoanv 

53,260,900 
27,000,000 
40,000,000 

46,484,-?0O 

Mational  Steel  Comoanv 

•^  2, 000, 000 

Mational  Tube  Comoanv     

40,000,000 

And  whereas,  the  Carnegie  Company  has  issued,  and  there  are  now 
outstanding,  its  5  per  cent  bonds  for  the  aggregate  principal  sum  of 
$160,000,000;  and 

Whereas,  the  Syndicate  has  arranged  for  the  acquisition  of  sub- 
stantially all  of  the  bonds  and  the  stock  of  the  Carnegie  Company; 
and 

Whereas,  in  reliance  upon  this  contract  the  Syndicate  is  endeavor- 
ing to  effect  the  acquisition,  and  the  delivery  of  all  of  the  bonds  of 
the  Carnegie  Company,  and  all  of  the  outstanding  shares  of  the  capital 
stock  of  all  of  said  corporations,  upon  the  terms  herein  provided. 

Now,  therefore,  in  consideration  of  the  premises  and  of  other  good 
and  valuable  considerations,  and  of  the  efforts  and  expenses  which 
both  parties  recognize  will  have  to  be  made  and  incurred  by  the  Syndi- 
cate in  their  endeavor  to  consummate  such  sale: 

First.  The  Steel  Company  agrees  with  J.  P.  Morgan  &  Co.,  act- 
ing in  behalf  of  the  Syndicate,  as  follows: 

(i)  If,  on  or  before  May  31,  1901,  J.  P.  Morgan  &  Co.,  in  behalf 
of  the  Syndicate  shall 


320  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

(a)  Sell  and  deliver,  or  cause  to  be  sold  and  delivered,  to  the  Steel 
Company,  at  least  fifty-one  per  cent  of  such  outstanding  shares  of 
the  capital  stock  of  each  of  the  corporations  above  named,  or  of  such 
of  said  corporations  as  finally  shall  be  embraced  within  the  operation 
of  this  agreement  with  the  approval  of  the  Steel  Company,  which 
fifty-one  per  cent  of  the  total  outstanding  capital  stock  of  each  of 
such  corporations  shall  include  not  less  than  fifty-one  per  cent  of  the 
total  outstanding  preferred  stock,  if  any,  of  such  company;  and  also 
all  of  the  $160,000,000  of  bonds  of  the  Carnegie  Company  now 
outstanding,  or  such  lesser  amount  thereof  as  shall  be  tendered  by 
J.  P.  Morgan  &  Co.;  and 

(b)  Shall  pay,  or  shall  cause  to  be  paid,  to  the  Steel  Company 
twenty-five  million  dollars  in  cash: 

(2)  The  Steel  Company  will  purchase  such  shares  and  bonds,  and, 
in  payment  and  consideration  for  such  stock  and  bonds  and  for  such 
cash,  will  issue  to  such  persons  as  J.  P.  Morgan  &  Co.,  in  behalf  of 
the  Syndicate,  shall  indicate,  shares  of  its  preferred  stock  and  shares 
of  its  common  stock  (all  of  which  shall  be  fully  paid  and  non-assess- 
able), and  also  its  five  per  cent  gold  bonds  (which  bonds  shall  be  of 
such  form  and  tenor,  and  shall  be  secured,  as  J.  P.  Morgan  &  Co. 
may  determine),  as  follows: 

(a)  In  the  event  that  the  Steel  Company  shall  acquire  all  the 
shares  of  the  capital  stock  of  all  of  such  other  corporations  and  all 
such  bonds  of  the  Carnegie  Company,  the  Steel  Company  will  issue 
for  all  such  stock,  and  such  bonds,  and  such  sum  in  cash,  four  million 
two  hundred  and  forty-nine  thousand  nine  hundred  and  eighty-five 
shares  of  its  preferred  stock,  and  four  million  two  hundred  and  forty- 
nine  thousand  nine  hundred  and  eighty-five  shares  of  its  common 
stock,  and  also  three  hundred  and  four  million  dollars  of  its  said  five 
per  cent  gold  bonds. 

(b)  In  the  event  that  the  Steel  Company  shall  not  acquire  all  the 
shares  of  the  capital  stock  of  all  of  such  other  corporations  and  all 
such  bonds  of  the  Carnegie  Company,  the  Steel  Company  will  issue 
for  the  shares  of  stock  and  the  bonds  which  shall  be  acquired,  and  said 
sum  in  cash,  four  miUion  two  hundred  and  forty-nine  thousand  nine 
hundred  and  eighty-five  (4,249,985)  shares  of  its  preferred  stock, 
and  four  million  two  hundred  and  forty -nine  thousand  nine  hundred 
and  eighty-five  (4,249,985)  shares  of  its  common  stock  and  three 
hundred  and  four  million  dollars  ($304,000,000)  of  its  5  per  cent  gold 
bonds,  less  abatement  and  deduction  therefrom  to  be  made  as  follows 


MODERN  CAPITALISTIC  ORGANIZATION 


321 


For  each  $100  par  value  of  stock  of  such  other  companies  men- 
tioned in  the  following  table,  which  shall  not  be  acquired  by  the  Steel 
Company,  the  amount  of  the  preferred  stock  and  common  stock  or 
either,  set  opposite  to  such  class  of  stock  in  said  table  shall  be  deducted 
and  abated. 


Naus  of  Company  and  Class  of  Stock 

Amount  op  Stock  to  be  Deducted 
IN  Par  Value 

Preferred  Stock 

Common  Stock 

Carnegie  Company 

$150.00 

110.00 
4.00 

117.50 

125.00 
8.80 

125.00 

125.00 
20.00 

100.00 
100.00 

$150.00 

Federal  Steel  Co.: 

Preferred  stock 

Common  stock 

107.50 

American  Stieel  and  Wire  Co.  of  N.J.: 

Preferred  stock 

Common  stock 

102 . 50 

National' Tube  Co.: 

Preferred  stock 

Common  stock 

125.00 

National  Steel  Co.: 

Preferred  stock 

Common  stock 

125.00 

American  Tin  Plate  Co.: 

Preferred  stock 

Common  stock 

125.00 

American  Steel  Hoop  Co.: 

Preferred  stock 

Common  stock 

100  00 

American  Sheet  Steel  Co.: 

Preferred  stock 

Common  stock 

100.00 

For  eacl)  $1,000  par  value  of  such  bonds  of  the  Carnegie  Company 
that  shall  not  be  acquired  by  the  Steel  Company  $1,000  par  value  of 
such  bonds  of  the  Steel  Company  shall  be  abated  and  deducted. 

Second.  The  Steel  Company  further  agrees  that  in  the  event  of 
the  acquisition  by  it  pursuant  to  this  agreement  of  less  than  the  total 
issue  of  said  bonds  of  the  Carnegie  Company  or  less  than  the  total 
outstanding  capital  stock  of  each  of  said  corporations,  the  Steel  Com- 
pany from  time  to  time  will  purchase  from  such  persons  as  shall  be 
indicated  by  J.  P.  Morgan  &  Co.,  any  and  all  additional  outstanding 
bonds  of  the  Carnegie  Company  or  shares  of  the  capital  stock  of  any 
of  said  corporations  that  shall  be  tendered  to  the  Steel  Company 
prior  to  May  i,  1902;  and  in  payment  therefor  will  issue  and  deliver 
its  bonds  and  fully  paid-up  shares  of  its  preferred  stock  and  fully 
paid-up  shares  of  its  common  stock,  at  the  rates  at  which  deduction 


322  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  abatement  shall  have  been  made  under  Article  First  hereof  in 
respect  of  the  additional  bonds  and  shares  of  stock  so  purchased. 

Third.  The  Steel  Company  shall  credit  and  allow  to  J.  P.  Morgan 
&  Co.  on  account  of  the  cash  sum  payable  under  Article  First  hereof, 
or  shall  pay  to  J.  P.  Morgan  &  Co.  a  sum  equal  to  the  aggregate 
amount  which,  prior  to  April  i,  1901,  shall  have  accrued  upon  any 
installments  of  dividends  accruing,  but  not  matured,  on  any  such 
preferred  stock  at  the  date  of  delivery  thereof  to  the  Steel  Company. 

The  Steel  Company  further  agrees  that  the  di\idends  on  all  the 
preferred  stock  of  the  Steel  Company  to  be  issued  by  it  hereunder, 
shall  begin  to  accrue  from  April  i,  1901. 

Fourth.  The  Steel  Company,  without  prejudice  to  the  further 
exercise  of  its  chartered  rights  to  increase  or  to  decrease  its  capital 
stock,  agrees  that  it  will  lawfully  increase  its  authorized  capital  stock 
to  an  amount  suflScient  to  enable  it  to  issue  and  to  deliver  its  preferred 
stock  and  its  common  stock  to  the  aggregate  amount  hereinbefore 
provided. 

Fifth.  J.  P.  Morgan  &  Co.,  in  behalf  of  the  Syndicate,  will  bear 
and  will  pay  the  statutory  fees  and  taxes  for  the  proposed  increase  of 
the  capital  stock  of  the  Steel  Company. 

Sixth.  This  agreement,  and  any  agreement  in  pursuance  thereof, 
is  and  shall  be  strictly  inter  paries;  and  no  stockholder  of  any  of  tht 
corporations  above  referred  to  shall  be  deemed  to  have  any  right 
hereunder. 

In  witness  whereof,  these  presents  have  been  duly  executed  by  the 
parties  hereto  the  day  and  year  first  above  written. 

United  States  Steel  Corporation, 
[i"S.]  By  W.  J.  Curtis,  President. 

Attest: 

Charles  MacVeagh, 

Secretary,  J.  P.  Morgan  6*  Co. 


MODERN  CAPITALISTIC  ORGANIZATION 


323 


-JO.  COMPANIES  WHOSE  STOCKS  WERE  ACQUIRED  BY  UNITED 
STATES  STEEL  CORPORATION  AT  OR  SHORTLY  AFTER 
ITS  ORGANIZATION  IN  1901,  AND  THE  PRINCIPAL  SUB- 
COMPANIES   OR  PROPERTIES  OF   THESE   CONSTITUENT 


COMPANIES' 


[See  reference  rtoles  on  p.  337. 


[The  subsidiary  companies  or  properties  of  the  constituent  concerns  here  given  are  those  held 
by  them  on  April  i,  igoi.  They  may  differ  from  those  originally  acquired  by  such  constituent  con- 
cerns, first,  because  some  of  the  properties  originally  acquired  by  them  were  dismantled  or  abandoned 
and,  second,  because  the  constituent  concerns,  as  indicated  on  this  table,  organized  some  of  these 
subsidiaries,  and  acquired  additional  properties.  Moreover,  a  number  of  the  plants  given  in  this 
table  were  dismantled  or  abandoned  immediately  after  the  formation  of  the  Steel  Corporation  Such 
plants  are  indicated  in  italics.  Most  of  the  subsidiaries  of  the  main  constituent  concerns  were  owned 
in  fee  in  1901.    Those  still  held  by  stock  ownership  in  igoi  are  indicated  by  an  asterisk.) 


I. 


COMPANIES  MAKING  CHIEFLY  CRUDE  AND  SEMIFINISHED  STEEL  OR  THE  HEAVIER 

FINISHED  STEEL  PRODUCTS 


Carnegie  Company  of  New  Jersey 


Carnegie    Steel    Company    of    Pennsylvania 

owning — 
Edgar  Thomson  Works,  Bessemer,  Pa. 
Duquesne  Works,  Duquesne,  Pa. 
Homestead  Works,  Munhall,  Pa. 
Upper  and  Lower  Union  MillS;  Pittsburg, 

Pa. 
Carrie  Blast  Furnaces,  Rankin,  Pa. 
Lucy  Blast  Furnaces,  Pittsburg,  Pa. 
Howard  Axle  Works,  Howard,  Pa. 

•  Pennsylvania  and  Lake  Erie  Dock  Company 

(43.6  per  cent). 

•  New  York,  Pennsylvania,  and  Ohio  Dock  Com- 

pany (25  per  cent). 

•  Carnegie  Land  Company. 

•  Conneaut  Land  Company. 

•  Oliver  Iron  Mining  Company  (83  J  per  cent) — 

Owning  a  large  number  of  active  and  in- 
active iron-ore  properties  on  the  Michigan 
and  Mesabi  Ranges,  acquired  from  various 
independent  mining  companies. 

Federal  Steel  Company 


♦  Pewabic  Company  (50  per  cent). 

*  Pittsburg,  Bessemer,  and  Lake  Erie  Railroad 
Company  (52  per  cent). 

♦  Union  Railroad  Company. 
•Pittsburg  Steamship  Company  (83 J  per  cent). 

•  Pittsburg  and  Conneaut  Dock  Company. 

♦  Pittsburg  Limestome  Company,  Ltd.  (75  per 
cent). 

•  Carnegie  Natural  Gas  Company. 

♦  Youghiogheny  Northern  Railway. 

*  Mount  Pleasant  Water  Company. 

♦  Youghiogheny  Water  Company. 

•  Trotter  Water  Company. 

♦  Mingo  Coal  Company. 

•  Union  Supply  Company. 

•  H.  C.  Frick  Coke  Company- 
Holding  by  direct  ownership  or  through  sub- 
sidiary companies  about  40,000  acres  of 
coking -coal    land;     11,000    coke    ovens; 
3,500  dwellings,  and  other  property. 


•  Illinois  Steel  Company — 

South  Chicago  Works. 
North  Chicago  Works. 
Milwaukee  Works. 
Union  Works. 
Joliet  Works. 

•  Southwest  Connellsville  Coke  Company. 

*  Chicago,  Lake  Shore,  and  Eastern  RaUway 

Company. 

•  Cundy  Iron  Company. 

•  Mount  Pleasant  Supply  Company. 

*  Minnesota  Iron  Company — 

Owning  various  ore  mines  and  undeveloped 
mineral  lands  in  Minnesota. 

♦  Duluth  and  Iron  Range  Railroad  Company. 

*  Minnesota  Steamship  Company. 


•  Minnesota  Dock  Company  (55  per  ctnt), 

•  Lorain  Steel  Company  (Ohio) — 

Steel  plant  at  Lorain,  Ohio. 

•  Lorain  Steel  Company  of  Pennsylvania — 

Steel  Plant  at  Johnstown,  Pa. 

(Formerly  owned  by  the  Johnson  Com- 
pany.) 

♦  Ingleside  Coal  Company. 

*  Johnstown  and  Stony  Creek  Railroad  Com- 

pany. 

*  Lake  Terminal  Railroad  Company. 

♦  Elgin,  Joliet,  and  Eastern  Railway  Company. 

*  Eureka  Fuel  Company.' 

*  Masontown  and  New  Salem  Railroad  Com- 

pany.' 

♦  Huron  Water  Company  (50  per  cent).' 


'  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
Part  I  (1911),  p.  107. 

[Compare  with   this  statement  Selection  68:     "The  Holding  Con^^ny  — 

EDITCUt«.) 


324 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


National  Steel  Company 


•  Ohio  Stee)  Company,  Youngitown,  Ohio — 

•  Biwabik  Mine  (25  per  cent). 
King,  Gilbert  &  Warner  Company,  Columbus, 
Ohio— 
•  Columbus  Stone  Company,    Columbus, 
Ohio  (66|  per  cent). 
Shenango  Valley  Steel  Company,  New  Castle, 
Pa. 

•  Bellaire  Steel  Company,  Bellaire,  Ohio. 

•  Aetna    Standard    Iron    and    Steel    Company, 

Mingo  Junction,  Ohio.' 
Buhl  Steel  Company,  Sharon,  Pa. 


Sharon  Iron  Company,  Ltd.,  Sharon,  Pa. 
Thomas  Furnace  Company,  Niies,  Ohio. 

•  Ohio  Iron  Company,  Zanesville,  Ohio. 

•  Rosena  Furnace  Company,  New  Castle,  Pa. 

•  National  Mining  Company  (jii  per  cent).» 

•  Chapin  Mining  Company. 

•  Winthrop  Iron  Company. 

•  Standard  Connellsville  Coke  Company,  Pleas 

ant  Unity,  Pa. 

•  Continental  Coke  Company,  Uniontown,  Pa 

•  Mutual  Transportation  Company. 

•  Menominee  Transit  Company. 


n.      COMPANIES   MAKING   MORE   HIGHLY   ELABORATED   PRODUCTS 

American  Sleel  and  Wire  Company  of  New  Jersey 


American  Steel  and  Wire  Company  of  Illinois — 

Consolidated  Steel  and   Wire   Company   (a 
consolidation,  with  6  plants  in  1901). 

Salem    Wire    Nail    Company,    Salem    and 
Findlay,  Ohio. 

H.  P.  Nail  Company,  Cleveland,  Ohio. 

American  Wire  Company,  Cleveland,  Ohio. 

American    Wire   Nail   Company,   Anderson, 
Ind. 

I.  L.  Ellwood  Manufacturing  Company,  De 
Kalb,  111. 

Ellwood  Wire  and  Nail  Company,  De  Kalb, 
111. 
Washburn  &  Moen  Manufacturing  Company 

(4  plants). 
Worcester  Wire  Company,  Worcester,  Mass. 
Cleveland   Rolling  Mill   Company,   Cleveland 

and  Newburg,  Ohio. 
Oliver  Wire  Company,  Pittsburg,  Pa. 
Oliver  &  Snyder  Steel  Company,  Pittsburg,  Pa. 
Pittsburg  Wire  Company,  Braddock,  Pa. 
Indiana  Wire  Pence  Company,  Crawjordsville, 

Ind. 
Garden    City     Wire    and     Spring    Company, 

Chicago,  III. 


Consolidated  Barb  Wire  Company,  Joliet,  III. 
and  Lnwrence,  Kan. 

Laidlaw  Bale  Tie  Company,  Joliet,  lU. 

Cincinnati  Barb  Wire  Fence  Company,  Cin- 
cinnati, Ohio. 

Union  Rolling  Mill  Company,  Cleveland,  Ohio. 

Portage  Iron  Company,  Duncansvitle,  Pa. 

Newburgh  Wire  and  Nail  Company,  Newburgh, 
N.Y. 

Allegheny  Furnace  Company,  Allegheny,  Pa. 

Shenango  Valley  Steel  Company,  New  Castle, 
Pa. 

Shoenberger  Steel  Company,  Pittsburg,  Pa. 

Puget  Sound  Wire  Nail  and  Steel  Company, 
Everett,  Wash. 

•  American  Mining  Company.* 

•  American  Coke  Company.* 

•  Juniata  Coke  Company,  Dawson,  Pa.  (so  per 

cent). 

•  American  Steamship  Company.* 

•  Edgar   Zinc   Company,    St.   Louis,   Mo.,   and 

Cherryvale,  Kan.  (80  per  cent). 

•  Pennsylvania  and  Lake  Erie  Dock  Company 

(ig  per  cent). 

•  Huron  Water  Company  (50  per  cent).* 


National  Tube  Company 


'  National  Tube  Works  Company,  McKeesport 

and  Pittsburg,  Pa. 
Riverside  Iron  Works,  Wheeling  and  Benwood, 

W.Va.,  and  Steubenville,  Ohio. 
Pennsylvania  Tube  Company,  Pittsburg,  Pa. 
Oil  City  Tube  Company,  Oil  City,  Pa. 
National  Galvanizing  Works,  Versailles,  Pa. 
Syracuse  Tube  Company,  Syracuse,  N.Y. 
Delaware  Iron  Company,  New  Castle,  Del. 
Allison  Manufacturing  Company,  Philadelphia 


Cohoes  Tube  Works,  Cohoes,  N.Y. 

Ohio  Tube  Company,  Warren,  Ohio,  and 
Norristown,  Pa. 

American  Tube  and  Iron  Company,  Middle- 
town,  Pa.,  and  Youngstown,  Ohio. 

Chester  Pipe  and  Tube  Company,  Chester,  Pa. 

Oil  Well  Supply  Company,  Pittsburg,  Pa. 

•  Western  Tube  Company,  Kewanee,  III. 

•  Pittsburg  Tube  Company,  Pittsburg,  Pa. 

•  Pennsylvania  and  Lake  Erie  Dock  Company 

(7  per  cent). 


MODERN  CAPITALISTIC  ORGANIZATION 


325 


Shelby  Steel  Tube  Company  of  New  Jersey 


Shelby  Steel  Tube  Company  of  Pennsylvania — 
Shelby  Steel  Tube  Company  of  Ohio— 

Garwood  Seamless  Tube  Company,  Gar- 
wood, N  J. 

Ellwood  Weldless  Tube  Company,  Ell- 
wood  City,  Pa. 

Greenville  Tube  Company,  Greenville, 
Pa. 

American  Weldless  Tube  Company, 
Toledo.  Ohio. 

Brewer  Tube  Company,  Toledo.  Ohio. 


Mansfield     Machin4     Works,     Mansfield, 

Ohio. 
United  Stales  Cold  Drawn  Steel  Company, 

Cuyahoga  Falls,  Ohio. 
Shelby    Steel    Tube    Company,    Shelby, 
Ohio. 
New  Castle  Tube  Company,  New  Castle,  Pa. 
Albany   Manufacturing   Company,  Albany, 

Ind. 
Auburn  Bolt  and  Nut  Works,  Auburn,  Pa. 
Pope  Tube  Company,  Hartford,  Conn. 


American  Tin  Plate  Company 


American  Tin  Plate  Company,  Elwood  and 
Montpelier,  Ind. 
•  New  Castle  Sheet    and  Tin  Plate  Company, 
New  Castle,  Pa. 

Shenango  Valley  Steel  Company,  New  Castle, 
Pa.« 

Monongahela  Tin  Plate  Company,  Pittsburg, 
Pa. 

United  States  Iron  and  Tin  Plate  Manufac- 
turing Company,  McKeesport,  Pa. 

National  Tin  Plate  Company,  Monessen,  Pa., 
and  Anderson,  Ind. 

Pittsburg  Tin  Plate  Works,  New  Kensington, 
•Pa. 

Pennsylvania     Tin     Plate     Company,     New 
Kensington,  Pa. 

SUr  Tin  Plate  Company,  Pittsburg,  Pa. 

Humbert  Tin   Plate  Company,  Connellsville, 
Pa. 

Washington  Steel  and  Tin  Plate  Mills,  Wash- 
ington, Pa. 

Crescent  Sheet  and  Tin  Plate  Company,  Cleve- 
land, Ohio. 

Falcon  Tin  Plate  and  Sheet  Company,  Niles, 
Ohio. 

Beaver  Tin  Plate  Company,  Lisbon,  Ohio. 

Irondale  Steel  and  Iron  Company,  Middleton, 
Ind. 

La  Belle  Iron  Works,  Wheeling,  W.Va.« 

Wallace,  Banfield  &  Co.,  Irondale,  Ohio. 

Aetna    Standard    Iron    and    Steel    Company, 
Bridgeport,  Ohio.' 


Atlanta   Steel  and  Tin  Plate  Company,  At- 
lanta, Ind. 

Baltimore  Tin  Plate  Company,  Baltimore,  Md. 

BlairsvilU  Rolling   Mill  and    Tin   Plate  Mill, 
Blairsville,  Pa. 

Cincinnati  Rolling  Mill  and  Tin  Plate  Com 
pany,  Cincinnati,  Ohio. 

Great  Western  Tin  Plate  Company,  Joliet,  III 

Ellwood  Tin  Plate  Company,  Ellwood  City, 
Pa. 

Johnstown  Tin  Plate  Company,  Johnstown, 
Pa. 

Laughlin  Nail  Company,  Martins  Ferry,  Ohio. 

Morewood  Company,  Gas  City,  Ind. 

Neshannock    Sheet    and    Tin    Plate    Company, 
New  Castle,  Pa. 

Ohio   River   Sheet  and  Tin   Plate   Company, 
Rochester,  Pa. 

Hamilton  &"  Co.,  West  Newton,  Pa. 

Marshall  Bros.  &•  Co.,  Philadelphia,  Pa. 

Britton    Rolling    Mill    Company,    Cleveland, 
Ohio.' 

CanoDsburg  Iron  and  Steel  Company,  Canons- 
burg,  Pa. 
•National  Mining  Company  (ai  per  cent).» 

Morton  Tin  Plate  Company,  Cambridge,  Ohio. 

Cumberland    Steel    and    Tin    Plate    Company, 
Cumberland,  Md. 
*  Champion  Iron  and  Steel  Company,  Muske- 
gon, Mich. 

Reeves  Iron  Company,  Canal  Dover,  Ohio. 


American  Sheet  Steel  Company 


Cambridge  Iron  and  Steel  Company,  Cam 
bridge,  Ohio. 

Cambridge  Manufacturing  Company,  Cam- 
bridge, Ohio. 

Canton  Rolling  Mill  Company,  Canton,  Ohio. 

Corning  Steel  Company.  Hammond,  Ind. 


Dennison   Rolling   Mill   Company,   Dennison, 

Ohio. 
Dresden    Iron    and    Steel    Sheet    Company, 

Dresden,  Ohio. 
Falcon  Iron  and  Nail  Company,  Niles,  Ohio. 
P.  H.  Laufman  &•  Co.,  Ltd..  Paulton.  Pa. 


326 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Saltsburg   Rolling   Mill   Company,  Saltsburg, 

Pa. 
Midland  Steel  Company,  Muncie,  Ind. 
Old   Meadow   Rolling   Mill   Company,  Scott- 
dale.  Pa. 
Piqua  Rolling  Mill  Company,  Piqua,  Ohio. 
Cincinnati      Corrugated     Company,      Piqua, 

Ohio. 
Stnithers  Iron  and  Steel  Company,  Stnithers, 

Ohio. 
Pittsburg      Steel      Manufacturing      Company, 

Shousetown,  Ohio. 
West  Penn  Sheet  Steel  Works,  Leechburg,  Pa. 
Chester    Rolling     Mill     Company,     Chester, 

VV.Va. 
Hyde  Park  Iron  and  Steel  Company,  Hyde 

Park,  Pa. 
Kirkpatrick  &  Co.,  Ltd.,  Leechburg,  Pa. 


Chartiere  Iron  and  Steel  Company,  Carnegie 

Pa. 
Scottdale    Iron    and    Steel    Company,    Ltd., 

Scottdale,  Pa. 
New   Philadelphia  Iron  and  Steel  Company, 

New  Philadelphia,  Ohio. 
Reeves  Iron  Company,  Canal  Dover,  Ohio. 
Aetna    Standard    Iron    and    Steel    Company, 

Bridgeport,  Ohio.' 
Apollo  Iron  and  Steel  Company,  Apollo  and 

Vandergrift,  Pa. — 

•  Apollo  Gas  Company. 

•  W.  Dewees  Wood  Company,  McKeesport,  Fa., 
and  WellsviUe,  Ohio— 

•  Versailles  Fuel  Gas  Company. 

•  McKeesport  Terminal  Railroad  Company. 
Coshocton   Rolling   Mill   Company,   Coshocton, 

Ohio. 


American  Steel  Hoop  Company 


'  Isabella  Furnace  Company,  Pittsburg,  Pa. 
William  Clark  &  Sons,  Pittsburg,  Pa. 
Lindsay  &  McCutcheon,  Pittsburg,  Pa. 
J.  Painter  &  Sons,  Pittsburg,  Pa. 
Monessen  Steel  Company,  Monessen,  Pa. 
Union  Iron  and  Steel  Company,  Youngstown, 

Warren,  and  Girard,  Ohio. 
Pomeroy  Iron  and  Steel  Company,  Pomeroy, 

Ohio. 
Portage   Iron   Company,   Ltd.,   Duncansville, 

Pa. 


P.  L.  Kimberly  &  Co.,  Greenville  and  Sharon, 
Pa. 
•Mahoning  Ore  and  Steel   Company    (ao  per 
cent). 

•  National  Mining  Company  (33  J  per  cent).' 

•  Union  Ore  Company  (30  per  cent). 

•  Pennsylvania  and  Lake  Erie  Dock  Company 

(8J  per  cent). 

•  Etna  and  Montrose  Railroad  Company. 


American  Bridge  Company 


American  Bridge  Works,  Chicago,  111. 

Berlin    Iron    Bridge    Company,    East    Berlin, 

Conn. 
Buffalo  Bridge  and  Iron  Works,  Buffalo,  N.Y. 
Carnegie  Steel  Company,  Limited  (Keystone 

Bridge    Company,    bridge    and    structural 

plant),  Pittsburg,  Pa. 

•  Detroit  Bridge  and  Iron  Works,  Detroit,  Mich. 
Edge  Moor  Bridge  Works,  Wilmington,  Del. 
Elmira  Bridge  Company,  Elmira,  N.Y. 
Gillette-Herzog      Manufacturing      Company, 

Minneapolis,  Minn. 
Groton  Bridge  and  Manufacturing  Company, 

Groton.  N.Y. 
Hilton  Bridge  Construction  Company,  Albany, 

N.Y. 
Horseheads    Bridge    Company,    Horseheads, 

N.Y. 

•  Koken  Iron  Works,  St.  Louis,  Mo. 
LaFayette  Bridge  Company,  LaFayette,  Ind. 
Lassig  Bridge  and  Iron  Works,  Chicago,  111. 
Nelson  &  Buchanan  Company,  Chambertburg, 

Pa." 


New  Columbus  Bridge  Company,  Columbus, 

Ohio. 
Pittsburg  Bridge  Company,  Pittsburg,  Pa. 
Post  &  McCord,  Brooklyn,  N.Y. 
Rochester  Bridge  and  Iron  Works,  Rochester, 

N.Y. 
Schultz  Bridge  and  Iron  Company,  Pittsburg. 

Pa. 
Shiffler  Bridge  Company,  Pittsburg,  Pa. 
Union  Bridge  Company,  Athens,  Pa. 
J.  G.  Wagner  Company  (bridge  and  structural 

plant),  Milwaukee,  Wis. 
Wrought  Iron  Bridge  Company,  Canton,  Ohio, 
Youngstown   Bridge   Company,   Youngstowa, 

Ohio. 

•  A.  &  P.  Roberts  Company,  known  as  Pencoyd 

Bridge  Works,  Pencoyd,  Pa. 

•  Toledo  Bridge  Company,  Toledo,  Ohio. 

•  Alabama  Bridge  and  Iron  Company,  Decatur, 

Ala. 

•  New  Jersey  Steel  and  Iron  Company.  Trenton 

N.J. 


MODERN  CAPITALISTIC  ORGANIZATION  327 

m.      MISCELLANEOUS 

Lake  Superior  Consolidated  Iron  Mines 

Owning   various   important   iron   mines   and  Also  owning  the  stock  of  Duluth,  Missabe 

properties  m  the  Lake  Superior  region,  con-  and  Northern  Railway  Company, 

trolling  several  hundred  million  tons  of  ore. 

Bessemer  Steamship  Company 
Owning  a  fleet  of  15  steamers- and  31  barges. 


•  Indicates  stock  ownership  in  1901. 

■  Organized  by  and  in  interest  of  Federal  Steel  Company.  It  may  also  be  noted  that,  except 
as  to  the  Illinois  Steel  Company's  manufacturing  plants,  most  of  the  various  subsidiaries  of  the  constitu- 
ent concerns  of  the  Federal  Steel  Company  were  directly  organized  by  them  and  not  acquired  from 
other  interests. 

•  Acquired  blast  furnaces  and  steel  works  only.     (See  note  6.) 

•  National  Mining  Company  was  promoted  and  organized  in  interest  of  National  Steel  Company, 
American  Steel  Hoop  Company,  and  American  Tin  Plate  Company. 

•  Promoted  and  organized  in  interest  of  American  Steel  and  Wire  Company  of  New  Jersey  after 
its  organization. 

•  Acquired  machinery  and  equipment  only. 

•  Acquired  tin-plate  machinery  and  equipment  only.  A  part  of  the  property  of  this  company 
was  acquired  by  other  constituent  concerns.  Such  a  division  of  plants  was  made  in  several  other 
instances. 

'  Acquired  sheet-mill  machinery  and  equipment  only. 


91.    AN  EXAMPLE  OF  TRUST  EFFICIENCY' 

The  International  Harvester  Co.,  generally  speaking,  has  an  ad- 
vantage over  independent  manufacturers  with  respect  to  the  cost  of 
production  of  its  machines.  This  is  especially  marked  in  the  case  of 
grain  binders,  the  most  important  of  the  harvesting  machines.  Thus, 
the  average  factory  cost  of  binders  for  the  International  Harvester 
Co.  at  its  domestic  plants  for  the  two  years,  1910  and  191 1  combined, 
was  $56 .32,  and  ranged  from  $54 . 1 1  to  $73 .  78  at  the  different  plants. 
While  the  company  produces  most  of  the  iron  and  steel  required — on 
which  its  subsidiary  steel  company  makes  a  very  large  profit — the 
cost  of  these  materials  to  its  implement  plants  is  based  on  prevailing 
market  prices,  so  that  its  costs  in  this  respect  are  comparable  with 
those  of  the  independent  producers.  For  the  four  independent  com- 
panies that  reported  to  the  Bureau  the  cost  of  their  binders,  the 
average  factory  cost  for  the  same  period  as  computed  from'  the  data 
reported  by  them  was  $70.38.  There  was  a  wide. range  of  cost 
among  the  four  independent  concerns,  but  only  two  of  them  showed 

'  Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  the  Inter- 
national Harvester  Co.  (1913),  pp.  26-28. 


328  MATERIAI^  FOR  ELEMENTARY  ECONOMICS 

a  materially  lower  cost  than  the  highest  cost  of  the  International 
Harvester  Co,  While  differences  in  the  style  of  construction  of  difler- 
ent  makes  of  binders  undoubtedly  explain  some  of  these  differences  in 
the  cost,  the  chief  reasons  therefor  were  differences  in  economy  of 
production,  in  which  the  International  Harvester  Co.  has  a  large 
advantage  in  its  great  volume  of  output,  at  least  at  its  McCormick  and 
Deering  plants.  The  output  at  these  plants,  however,  was  equally 
large  before  the  merger. 

These  figures  of  factory  costs  do  not  take  account  of  general  and 
miscellaneous  expenses,  nor  of  a  much  heavier  selling  expense  which 
for  binders  sometimes  amounts  to  $20.00  or  even  $25 .00  per  machine. 
General  and  miscellaneous  expenditures  were  relatively  much  heavier 
for  the  independent  companies  than  for  the  International  Harvester 
Co.,  chiefly  on  account  of  great  differences  in  volume  of  business, 
though  possibly  due  also  to  differences  in  methods  of  keeping  cost 
accounts.  They  may  properly  be  grouped  with  manufacturing 
costs  for  the  purpose  of  this  comparison.  If  these  expenditures  are 
prorated  over  the  cost  of  production,  both  for  the  International 
Harvester  Co.  and  the  independents,  the  average  cost  of  binders  for 
the  International  Harvester  Co.  becomes  $58.57,  and  for  the  four 
independents  $76.18. 

A  proper  understanding  of  these  relations  of  cost  of  production  to 
the  competitive  position  of  the  independent  binder  manufacturers, 
requires  consideration  also  of  the  question  of  selling  expense.  The 
selling  expense  per  binder  for  the  International  Harvester  Co.  is 
considerably  higher  than  the  average  selling  expense  of  the  independ- 
ents, and  this  fact  partly  compensates  the  latter  for  their  higher 
average  costs  of  production.  Nevertheless  the  margin  of  profit 
between  prices  and  cost  of  production  and  selling  expense  combined 
is  markedly  lower  for  the  independents  than  for  the  International 
Harvester  Co.  Apparently  the  relatively  high  selling  expense  of  the 
International  Harvester  Co.  is  due  to  the  policy  of  maintaining  a 
very  elaborate  selling  organization,  which  gives  it  a  strong  hold  on  the 
trade  and  helps  to  secure  to  it  a  large  volume  of  business.  It  appears 
to  be  the  company's  policy  thus  to  maintain  an  expensive  selling  organ- 
ization to  push  the  sale  of  its  goods  rather  than  reduce  prices  on  some 
of  its  most  important  lines,  particularly  harvesting  machines. 

Similarly  in  the  case  of  mowers  and  rakes,  for  which  the  Bureau 
had  sufl5cicnt  data  for  comparing  the  costs  of  the  International 
Harvester  Co.  with  those  of  independents,  it  was  found  that  the 


MODERN  CAPITALISTIC  ORGANIZATION  329 

average  cost  of  manufacture  at  the  plants  of  the  International 
Harvester  Co.  for  the  years  19 10  and  1911  combined  was  lower  than 
the  average  cost  of  the  independents  reporting.  Prorating  general 
and  miscellaneous  expense  over  the  factory  cost  of  these  machines 
the  advantage  of  the  International  Harvester  Co.  in  this  respect  over 
the  independents  was  even  greater. 

92.     PROPOSED  REMEDIES  FOR  THE  EVILS  OF  TRUSTS 

1.  Let-alone  policy. — Several  of  the  witnesses  are  of  the  opinion 
that  any  evils  connected  with  the  industrial  combinations  will  be 
remedied  in  the  ordinary  course  of  business,  and  that  any  attempt 
at  regulation  by  law  would  be  likely  to  result  in  more  harm  than  good. 
Competition,  either  active  or  potential,  is  beheved  by  these  witnesses 
to  be  a  sufficient  preventive  of  monopoly  and  extortionate  prices, 
while  stockholders  and  investors  are  believed  to  be  already  sufficiently 
protected  by  statute  and  common  law,  especially  in  view  of  the  fact 
that  the  state  cannot  guarantee  to  these  persons  immunity  from 
carelessness  and  ignorance  on  their  own  part.  It  is  also  urged  that, 
under  the  common  law  alone,  the  courts  have  always  held  as  illegal 
any  monopoly  or  combination  distinctly  shown  to  be  in  restraint  of 
trade. 

While  making  this  general  expression  of  opinion,  some  of  these 
witnesses  afterward  admitted  that  certain  measures  tending  toward 
giving  the  public,  and  particularly  the  stockholders,  more  informa- 
tion regarding  the  nature  of  the  business  might  be  advisable. 

2.  Direct  suppression  of  monopolistic  combinations. — A  few  wit- 
nesses are  inclined  to  favor  the  more  general  enactment  of  statutes 
along  the  lines  of  those  already  adopted  by  numerous  states,  directly 
prohibiting  the  transaction  of  business  by  combinations  seeking  to 
restrain  trade  or  to  control  prices.  Some  witnesses  believe  that  the 
present  statutes,  in  regard  to  the  states  where  they  have  been  enacted, 
in  conjimction  with  the  national  antitrust  law  of  1890,  and  the 
interstate  commerce  law,  would,  if  vigorously  enforced,  be  all  the 
legislation  necessary. 

Perhaps  a  greater  number  of  witnesses,  however,  directly  expressed 
themselves  as  opposed  to  so-called  "antitrust"  legislation,  while 
others  distinctly  imply  a  similar  opposition.    These  witnesses,  includ- 


330  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

ing  some  opponents  of  individual  combinations,  as  well  as  lawyers, 
hold  that  combination  is  a  natural  outgrowth  of  modem  conditions, 
and  that  it  is  practically  impossible  to  suppress  it.  If  any  legislation 
is  needed,  it  should  be  in  the  form  of  regulation  and  publicity  only. 

3.  Prohibition  of  destructive  competition. — Two  or  three  witnesses 
testifying  in  opposition  to  the  Standard  Oil  Company  advocate 
legislation  to  prohibit  "destructive  competition."  The  witnesses 
have  in  mind  especially  the  cutting  of  prices  in  local  markets,  while 
retaining  them  at  high  figures  in  other  parts  of  the  country.  A 
requirement  that,  freight  rates  being  considered,  prices  should  be 
made  imiform  in  all  markets  is  advocated.  It  is  also  suggested  that 
general  cutting  of  prices  below  actual  cost  of  production  for  the  pur- 
pose of  driving  out  competitors  should,  perhaps,  be  prohibited.  No 
criticism  upon  these  suggestions  is  offered  directly  by  other  witnesses. 
In  connection  with  this  Senator  Lee  advocated  limiting  capitalization. 

4.  Publicity. — Many  of  the  witnesses,  including  even  representa- 
tives of  combinations,  are  of  the  opinion  that  a  much  greater  publicity 
regarding  the  affairs  of  such  combinations  than  is  now  customary 
would  tend  to  remove  many  of  the  evils.  As  regards  the  general 
public,  the  knowledge  thus  secured  would  avail  to  prevent  the  main- 
tenance of  extortionate  prices  as  well  as  unfair  methods  and  condi- 
tions of  competition.  Stockholders  and  investors  would  also  be 
protected  against  abuses  by  promoters  and  officers  of  corporations. 

How  this  publicity  should  be  brought  about  and  the  degree  to 
which  it  should  extend  is  a  matter  upon  which  no  general  agreement 
existed  among  the  witnesses.  Some  are  inclined  to  think  that  it 
would  be  wise  if  somewhat  detailed  balance  sheets  of  the  accounts  of 
the  larger  combinations  could  be  made  public.  More  of  the  witnesses, 
including  especially  lawyers  and  officers  of  corporations,  seem  rather 
of  the  opinion  that  when  the  corporation  is  first  organized  the  details 
regarding  its  organization,  the  values  at  which  plants  and  other 
property  are  taken  in,  the  profits  of  the  promoters,  etc.,  should  be 
made  public.  After  the  corporation  has  been  engaged  in  business, 
however,  while  the  details  of  its  management  should  be  made  known 
with  considerable  fulhiess  to  the  stockholders,  the  outside  public 
should  be  given  little  more  information  than  at  present,  lest  thereby 
competitors  may  seciu-e  an  advantage. 

Many  of  the  witnesses  believe  that  publicity,  if  properly  estab- 
lished and  enforced,  would  prove  a  very  efficient  remedy.  Others 
♦hink  that,  while  it  might  be  useful,  it  would  not  alone  be  suflficient. 


MODERN  CAPITALISTIC  ORGANIZATION  331 

At  least  one  of  the  witnesses  is  of  the  opinion  that  this  publicity 
should  be  enforced  upon  all  public  corporations,  such  as  railways, 
street  railways,  etc.,  but  not  upon  ordinary  manufacturing  or 
mercantile  corporations. 

Strong  differences  of  opinion  exist  among  the  different  witnesses 
as  to  whether  legislation  along  any  of  the  lines  suggested,  or  additional 
legislation,  should  be  by  the  individual  states  or  by  the  federal 
govemment.  The  witnesses  also  disagree  as  to  the  constitutionality 
of  various  forms  of  legislation,  both  in  the  case  of  the  states  and  in 
the  case  of  the  federal  govemment.  Some  witnesses  were  of  the 
opinion  that  state  legislation  would  be  of  little  service  imless  prac- 
tically all  of  the  states  adopted  uniform  laws,  and  this  is  considered 
an  impossibility.  Others  seem  to  think  that  legislation,  even  by  a 
few  of  the  states,  if  of  the  right  kind,  would  be  very  useful.  There 
is  perhaps,  however,  a  rather  general  expression  of  opinion  among 
those  who  favor  any  legislation  at  all  that  federal  legislation,  if  con- 
stitutional, is  desirable,  at  least  to  supplement  state  legislation  as  to 
combinations,  if  not,  perhaps,  to  take  entire  jurisdiction  regarding 
them. 

5.  State  legislation. — ^The  chief  specific  suggestions  regarding 
state  legislation  were: 

(a)  The  classification  of  corporations  should  be  made  much 
stricter  than  at  present,  and  each  class  should  be  confined  closely  to 
the  exercise  of  its  specified  powers. 

(b)  There  should  be  strict  inspection  of  corporations  by  state 
officials,  and  publicity  should  be  enforced  through  reports.  This, 
of  course,  applies  primarily  to  action  by  the  states  as  regards  their 
own  domestic  corporations. 

(c)  Combinations,  in  whatever  form  (even  if  it  be  that  of  a  single 
corporation),  between  different  corporations,  where  monopolistic 
intent  can  be  shown,  should  be  prohibited. 

(d)  Foreign  corporations  should  be  forbidden  by  each  state  to  do 
business  within  its  borders  imless  conforming  to  its  laws.  As  to  this 
last  suggestion,  the  powers  of  states  over  foreign  corporations,  so  far 
as  their  interstate  business  is  concerned,  would  be  very  limited.  It 
appears  that  the  courts  would  be  likely  to  hold  that  the  states  would 
require  a  special  authorization  from  Congress  to  enable  them  to 
act  with  any  considerable  effectiveness  in  this  regard,  even  if  the 
power  could  be  secured  in  that  way. 

6.  Federal  legislation. — The  lines  of  federal  legislation  suggested 
fall  mainly  under  the  following  heads: 


332  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

(a)  Creation  of  federal  corporations  under  strict  federal  laws. 
Some  would  favor  incorporation  under  federal  laws  only  in  case  of 
very  large  corporations,  while  from  the  legal  standpoint  some  others 
would  fix  the  distinction  between  state  and  federal  corporations 
along  the  line  of  commerce  within  the  states  as  distinguished  from 
interstate  commerce.  The  representatives  of  combinations  favoring 
such  federal  laws  consider  that  one  of  their  chief  advantages  would 
be  to  prevent  unwarranted  interference  with  the  business  of  the  cor- 
porations by  individual  states.  Some  of  the  witnesses,  however, 
consider  that  the  creation  of  federal  corporations  would  be  harmful 
as  well  as  imconstitutional. 

(b)  In  connection  with  federal  incorporation,  or  apart  from  it, 
certain  witnesses  favor  a  considerable  degree  of  regulation  of  corpora- 
tions on  the  part  of  the  federal  government.  In  this  connection, 
publicity,  through  reports  and  inspection,  is  advocated.  A  Bureau 
of  Industry  is  suggested  by  one  witness,  having  powers  somewhat 
similar  to  those  of  the  Interstate  Commerce  Commission.  The 
reports  to  be  made  to  this  body  should  be  of  such  a  nature  as  to  dis- 
close the  condition  of  the  business  of  the  corporation,  especially  as  to 
whether  it  possessed  or  was  likely  to  acquire  a  monopoly  or  not. 

(c)  Strengthen  Interstate  Commerce  Commission. — Some  of  the 
witnesses  complain  of  the  inefficiency  of  the  Interstate  Commerce 
Commission.  Others  urge  that  it  be  given  greater  power,  even 
judicial  power,  and  that  pooling  among  railroads  be  permitted  under 
its  supervision.  Especially  is  it  recommended  in  the  testimony 
taken  before  the  subcommission  on  transportation  that  its  hands  be 
strengthened  by  giving  it  power  of  audit  of  railway  accounts,  power 
of  enforcing  its  decisions,  etc.,  it  being  urged  that  in  this  way  freight 
discriminations  in  favor  of  the  large  shippers,  the  combinations, 
could  be  prevented. 

(d)  Two  witnesses  are  inclined  to  the  opinion  that  unless  Congress 
in  some  way  assumes  full  control  of  corporations  the  United  States 
Government  should  remove,  by  specific  act  of  Congress,  the  limita- 
tions which  now  are  likely  to  be  laid  by  the  courts,  on  the  basis  of 
the  federal  constitution,  upon  the  powers  of  the  states  over  monopo- 
listic combinations,  so  far  as  their  interstate  business  is  concerned. 
It  was  thought,  on  the  whole,  that  such  an  act  of  Congress  would 
probably  be  upheld  as  constitutional  by  the  courts. 

(e)  Removal  or  lowering  of  tariff. — Several  of  the  witnesses,  though 
not  objecting  in  the  main  to  the  principle  of  a  protective  tariff,  were 


MODERN  CAPITALISTIC  ORGANIZATION  ^^^ 

of  the  opinion  that  in  some  cases  the  tariff  encouraged,  or,  even  as 
one  said,  was  the  chief  cause  of  the  trust.  In  such  cases  they  thought 
it  should  be  lowered  or  abolished.  Mr.  Havemeyer  expressed  him- 
self most  strongly  in  favor  of  a  low  horizontal  tariff  of  not  over  lo 
per  cent,  while  Mr.  Buynitsky  proposed  that  if  there  were  shown  to  be 
a  monopoly  in  any  protected  industry  the  president  might  be  em- 
powered to  lower  the  tariff  on  the  products  of  that  industry,  by 
executive  order,  not  more  than  20  per  cent,  nor  for  a  longer  period 
than  five  years. 

(/)  Powers  of  Congress. — Much  discussion  was  presented  before 
the  Commission  as  to  the  constitutional  powers  of  Congress  to  enact 
legislation  along  any  of  the  lines  above  suggested.  It  is  admitted 
that  Congress  has  exclusive  control  over  interstate  commerce,  and 
the  preponderance  of  opinion  seems  to  be  that  it  has  power  to  create 
corporations  to  carry  on  such  commerce,  although  this  is  disputed. 
Congress  is  admitted  to  have  no  power  over  purely  manufacturing 
corporations  not  engaged  in  interstate  business.  There  is  much 
doubt,  however,  as  to  the  precise  line  where  business  ceases  to  be 
domestic  and  becomes  interstate.  Professor  HuflFcut,  at  least,  is 
inclined  to  think  that  the  courts,  even  under  the  present  constitution, 
would  uphold  quite  general  control  over  the  general  business  of  corpo- 
rations carrying  on  a  widespread  business  among  the  several  states, 
on  the  groimd  that  a  large  portion,  at  least,  of  that  business — perhaps 
most  of  it — is  interstate  in  character.  The  control  of  that  would 
practically  control  all.  In  this  connection  this  witness  suggests  that 
Congress  could  probably  constitutionally  compel  such  large  corpora- 
tions to  submit  to  federal  legislation,  and  perhaps  to  incorporate 
under  federal  laws,  by  one  of  the  three  following  methods: 

a)  By  forbidding  the  use  of  the  mails  to  state  corporations 
engaged  in  interstcrte  commerce,  especially  so  far  as  they  are  shown 
to  be  monopolistic  and  therefore  subject  to  the  police  power. 

b)  By  levying  a  practically  prohibitive  tax  upon  state  corpora- 
tions engaged  in  interstate  commerce,  as  has  been  done  with  note 
issues  of  state  banks.  Other  witnesses  suggest  that  the  Government 
can  acquire  jurisdiction,  in  order  to  compel  reports  and  publicity, 
by  imposing  taxes,  and  some  are  inclined  to  suggest  that  these  taxes 
should  be  made  progressive. 

c)  By  directly  prohibiting  state  corporations  from  engaging  in 
interstate  commerce. 


334  MATERIALS  FOR  ELEMENTARY  ECONOMICS 


93.     FEDERAL  ANTI-TRUST  LEGISLATION 

I.      THE   SHERMAN    ANTI-TRUST   ACT' 


§  I.  Every  contract,  combination  in  the  form  of  trust  or  otherwise, 
or  conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  is  hereby  declared  to  be  illegal.  Every 
person  who  shall  make  any  such  contract,  or  engage  in  any  such  com- 
bination or  conspiracy,  shall  be  deemed  guilty  of  a  misdemeanor,  and, 
on  conviction  thereof,  shall  be  punished  by  fine  not  exceeding  five 
thousand  dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by 
both  said  punishments,  in  the  discretion  of  the  court, 

§  2.  Every  person  who  shall  monopolize,  or  attempt  to  monopolize, 
or  combine  or  conspire  with  any  other  person  or  persons  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several  states,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  con- 
viction thereof,  shall  be  punished  by  fine  not  exceeding  five  thousand 
dollars,  or  by  imprisonment  not  exceeding  one  year,  or  by  both  said 
punishments,  in  the  discretion  of  the  court. 

§  3.  Every  contract,  combination  in  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  in  any  territory  of  the 
United  States  or  of  the  District  of  Columbia,  or  in  restraint  of  trade  or 
commerce  between  any  such  territory  and  another,  or  between  any 
such  territory  or  tenitories  and  any  state  or  states  or  the  District  of 
Columbia,  or  with  foreign  nations,  or  between  the  District  of  Colum- 
bia and  any  state  or  states  or  foreign  nations,  is  hereby  declared 
illegal.  Every  person  who  shall  make  any  such  contract  or  engage  in 
any  such  combination  or  conspiracy  shall  be  deemed  guilty  of  a  mis- 
demeanor, and,  on  conviction  thereof,  shall  be  punished  by  fine  not 
exceeding  five  thousand  dollars,  or  by  imprisonment  not  exceeding 
one  year,  or  by  both  said  punishments,  in  the  discretion  of  the  court. 

•  76  U.S.  Statutes  309. 


MODERN  CAPITALISTIC  ORGANIZATION  335 

§  4.  The  several  circuit  courts  of  the  United  States  are  hereby 
invested  with  jurisdiction  to  prevent  and  restrain  violations  of  this 
act;  and  it  shall  be  the  duty  of  the  several  district  attorneys  of  the 
United  States,  in  their  respective  districts,  under  the  direction  of  the 
Attorney- General,  to  institute  proceedings  in  equity  to  prevent  and 
restrain  such  violations.  Such  proceedings  may  be  by  way  of  petition 
setting  forth  the  case  and  praying  that  such  violation  shall  be  enjoined 
or  otherwise  prohibited.  When  the  parties  complained  of  shall  have 
been  duly  notified  of  such  petition  the  court  shall  proceed,  as  soon  as 
maybe,  to  the  hearing  and  determination  of  the  case;  and,  pending 
such  petition,  and  before  final  decree,  the  court  may  at  any  time  make 
such  temporary  restraining  order  or  prohibition  as  shall  be  deemed 
just  in  the  premises. 

§  5.  Whenever  it  shall  appear  to  the  court  before  which  any  pro- 
ceeding under  section  four  of  this  act  may  be  pending,  that  the  ends 
of  justice  require  that  other  parties  should  be  brought  before  the 
court,  the  court  may  cause  them  to  be  summoned,  whether  they  reside 
in  the  district  in  which  the  court  is  held  or  not;  and  subpoenas  to 
that  end  may  be  served  in  any  district  by  the  marshal  thereof. 

§  6.  Any  property  owned  under  any  contract  or  by  any  combina- 
tion, or  pursuant  to  any  conspiracy  (and  being  the  subject  thereof) 
mentioned  in  section  one  of  this  act,  and  being  in  the  course  of  trans- 
portation from  one  state  to  another,  or  to  a  foreign  country,  shall  be 
forfeited  to  the  United  States,  and  may  be  seized  and  condemned  by 
like  proceedings  as  those  provided  by  law  for  the  forfeiture,  seizure, 
and  condemnation  of  property  imported  into  the  United  States  con- 
trary to  law. 

§  7.  Any  person  who  shall  be  injured  in  his  business  or  property 
by  any  other  person  or  corporation  by  reason  of  anything  forbidden  or 
declared  to  be  unlawful  by  this  act  may  sue  therefor  in  any  circuit 
court  of  the  United  States  in  the  district  in  which  the  defendant  resides 
or  is  found,  without  respect  to  the  amount  in  controversy,  and  shall 
recover  threefold  the  damages  by  him  sustained,  and  the  costs  of  suit, 
including  a  reasonable  attorney's  fee. 

§  8.  That  the  word  "person"  or  "persons,"  wherever  used  in  this 
act,  shall  be  deemed  to  include  corporations  and  associations  existing 
under  or  authorized  by  the  laws  of  either  the  United  States,  the  laws 
of  any  of  the  territories,  the  laws  of  any  state,  or  the  laws  of  any  foreign 
country. 


336  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

n.      PROVISIONS    OF   THE   FEDERAL   TRADE   COMMISSION   ACT 

This  act  creates  a  Federal  Trade  Commission  of  five  members, 
appointed  by  the  President  with  the  consent  of  the  Senate.  The 
members  serve  for  a  terra  of  seven  years  with  an  annual  salary  of 
$10,000.  The  Commission  succeeds  to  the  work  of  the  Bureau  of 
Corporations. 

Unfair  methods  of  competition  in  commerce'  are  declared  unlaw- 
ful and  the  Commission  is  to  prevent  persons,  partnerships  or  cor- 
porations (except  banks  and  common  carriers,  which  are  otherwise 
controlled)  from  using  such  methods.  Where  such  methods  are  in 
use  and  the  Commission  deems  it  to  the  interest  of  the  public  to  have 
them  stopped  the  Commission  must  hold  a  hearing,  and  if  it  then 
considers  the  methods  employed  illegal  under  this  act  it  shall  order 
the  practice  stopped.  The  party  subject  to  the  order  may  appeal 
from  it  to  the  United  States  Circuit  Court  of  Appeals,  and  the  Com- 
mission, in  case  its  order  is  not  obeyed,  may  appeal  to  the  Court  to 
enforce  its  order.  The  findings  of  the  Commission,  if  supported  by 
testimony,  are  conclusive  in  the  Court.  The  Court  may  affirm, 
modify,  or  set  aside  the  order  of  the  Commission. 

The  Commission  has  the  power:  (a)  to  gather  information  about, 
and  investigate  the  business  of,  those  subject  to  this  act;  (b)  to  require 
special  and  annual  reports  of  such  corporations;  (c)  to  investigate, 
and  on  request  of  the  Attorney-General  they  must  investigate,  the 
way  in  which  court  decrees  against  the  violation  of  the  federal  anti- 
trust laws  are  being  carried  out;  (d)  on  the  direction  of  the  President 
or  either  House  of  Congress  to  investigate  and  report  the  facts  as  to 
any  alleged  violation  of  the  anti-trust  laws;  (e)  on  application  of  the 
Attorney-General  to  investigate  and  recommend  readjustments  in  the 
business  of  any  corporation  alleged  to  be  violating  those  laws;  (/)  to 
make  public  such  information,  except  trade  secrets  and  names  of 
customers,  as  it  may  deem  expedient  in  the  public  interest,  and  to 
submit  reports  and  recommendations  for  legislation  to  Congress; 
(g)  to  classify  corporations  and  make  rules  to  carry  out  this  act; 
(h)  to  investigate  trade  conditions  in  and  with  foreign  countries 
where  combinations,  practices,  or  other  conditions  may  affect 
our  foreign  trade,  and  to  report  thereon  to  Congress  with  any 
recommendations. 

'  [What  constitutes  "unfair  methods  of  competition,"  not  being  defined  in  the 
act,  is  left  for  the  Commission  to  determine.  This  in  part  explains  the  absence  ol 
any  penally  for  committing  such  acts. — Editors.] 


MODERN  CAPITALISTIC  ORGANIZATION  337 

Power  is  given  the  Commission  to  simimon  witnesses  to  testify, 
secure  records,  etc.,  and  penalties  are  provided  for  failure  to  obey  its 
orders  in  these  respects.  But  no  person  shall  be  prosecuted  or  penal- 
ized on  account  of  any  matter  concerning  which  he  may  testify  or 
produce  evidence  under  subpoena  of  the  Commission. 

ni.      PROVISIONS    OF   THE   CLAYTON   ANTI-TRUST   ACT 

The  term  "Omnibus  Bill"  frequently  applied  to  the  Clayton  act 
well  indicates  its  character  as  covering  a  wide  range  of  more  or  less 
related  topics.  For  the  sake  of  greater  clearness  concerning  its  sig- 
nificant features  only  the  chief  provisions  are  stated  here,  though 
nothing  but  a  detailed  study  of  the  phraseology  of  the  act  itself  can 
give  an  accurate  conception  of  its  provisions. 

In  the  main  the  act  attempts  to  deal  with  two  things:  (i)  it  seeks 
to  check  certain  undesirable  practices  found  among  industrial  com- 
binations, railroads,  and  banking  institutions;  (2)  it  seeks  to  give 
labor  organizations  greater  freedom  from  prosecution  under  the  anti- 
trust laws  and  in  proceedings  connected  with  injunctions. 

In  connection  with  the  first  purpose  the  law  forbids:  (a)  discrimi- 
nations in  prices  between  purchasers  where  the  effect  may  be 
substantially  to  lessen  competition  or  create  monopoly,  though  differ- 
ences in  price  due  to  variations  in  quantity,  quality,  cost  of  selling, 
or  transportation,  etc.,  are  permitted;  (b)  "tying  clauses"  where 
lommodities,  patented  or  unpatented,  are  leased  or  sold,  or  a  price  is 
fixed  or  discount  or  rebate  given,  on  condition  that  the  lessee  or  pur- 
chaser shall  not  use  or  deal  in  the  goods  of  a  competitor  and  where 
the  effect  of  such  an  understanding  is  substantially  to  lessen  compe- 
tition or  tend  to  create  a  monopoly  in  any  line  of  commerce;  (c)  the 
holding  of  the  stock  of  one  corporation  by  another  where  the  effect 
may  be  substantially  to  lessen  competition  or  tend  to  create  a  mo- 
nopoly, (but  this  does  not  apply  to  the  cases  of  certain  subsidiaries  or 
to  branch  lines  or  extensions  of  railroads  or  to  stock  purchased  solely 
as  an  investment  where  there  is  no  such  tendency  nor  to  such  rights 
heretofore  legally  acquired);  (d)  after  two  years  no  person  shall  be  a 
director,  officer,  or  employee  of  more  than  one  bank  where  one  of 
them  is  organized  under  the  laws  of  the  United  States  and  either  has 
deposits,  capital,  surplus,  and  undivided  profits  of  over  $5,000,000; 
nor  shall  one  person  be  an  officer,  director,  or  employee  of  more  than 
one  bank  in  any  place  of  over  200,000  inhabitants  where  either  bank 


338  MATERULS  FOR  ELEMENTARY  ECONOMICS 

is  organized  under  the  laws  of  the  United  States;  nor  shall  one  person 
be  a  director  in  more  than  one  concern  engaged  in  commerce  (other 
than  banking  institutions  and  common  carriers)  any  one  of  which 
has  capital,  surplus,  and  undivided  profits  over  $1,000,000  if  such 
concerns  are  or  have  been  competitors  so  that  an  elimination  of  their 
competition  would  constitute  a  violation  of  the  anti-trust  laws. 

In  the  case  of  railroads,  after  two  years,  contracts  or  purchases 
of  goods  to  the  amount  of  over  $50,000  in  any  one  year  from  other 
concerns,  when  the  president,  manager,  purchasing  officer,  or  agent 
of  the  railroad  is  in  any  way  interested  in  such  concern,  shall  not  be 
made  except  through  free  competitive  bids  under  rules  determined 
by  the  Interstate  Commerce  Commission, 

Any  person  injured  in  his  business  by  anything  forbidden  in  the 
anti-trust  laws  can  sue  in  the  federal  courts  and  recover  treble  dam- 
ages. A  violation  of  any  of  the  penal  provisions  of  the  anti-trust 
laws  by  a  corporation  shall  also  be  deemed  a  violation  by  the  officers 
authorizing  the  act  and  deemed  a  misdemeanor  subject  to  fine  or 
imprisonment. 

The  prohibitions  enumerated  above  are  to  be  enforced,  where 
applicable  to  common  carriers,  by  the  Interstate  Commerce  Com- 
mission; where  applicable  to  banking  institutions,  by  the  Federal 
Reserve  Board;  where  applicable  to  concerns  otherwise  engaged  in 
commerce,  by  the  Federal  Trade  Commission.  Whenever  there  is 
reason  to  believe  that  any  of  these  prohibitions  are  being  violated  the 
respective  board  or  commission  shall  serve  a  complaint  on  the  offend- 
ing person  or  concern  and  hold  a  hearing,  and  if  it  shall  then  appear 
that  the  law  is  being  violated  an  order  shall  be  issued  against  the  prac- 
tice. The  person  or  concern  against  whom  it  is  issued,  or,  in  case  the 
order  is  not  obeyed,  the  respective  board  or  commission,  may  appeal 
to  the  United  States  Circuit  Court  of  Appeals,  which,  upon  a  hearing, 
may  affirm,  modify,  or  set  aside  the  order. 

In  the  second  group  of  provisions,  which  includes  those  dealing 
with  labor  organizations  and  their  practices,  the  law  first  declares  that 
the  labor  of  a  human  being  is  not  a  commodity  or  an  article  of  com- 
merce and  that  nothing  in  the  anti-trust  laws  shall  be  construed  to 
forbid  the  existence  and  operation  of  labor,  agricultural,  or  horticul- 
tural organizations,  or  to  restrain  them  from  lawfully  carrying  out 
their  objects,  nor  shall  such  organizations  be  construed  to  be  illegal 
combinations  under  the  anti-trust  laws. 


MODERN  CAPITALISTIC  ORGANIZATION  339 

The  law  somewhat  modifies  the  use,  and  the  method  of  issuing  and 
enforcing  injunctions  in  labor  disputes,  prohibiting  their  use  unless 
necessary  to  prevent  irreparable  injury  to  property  rights  for  which 
there  is  no  adequate  remedy  at  law.  Also  injunctions  shall  not  be 
issued  against  striking  and  peaceful  picketing  or  boycotting  by  peace- 
ful and  lawful  means,  and  such  acts  shall  not  be  held  to  be  a  violation 
of  any  law  of  the  United  States.  In  cases  of  contempt  of  court  arising 
under  this  act  the  accused  may  demand  a  trial  by  jury,  except  in  suits 
prosecuted  by  the  United  States  or  cases  of  contempt  in  or  near  the 
presence  of  the  court. 


VIII.    MARKETS  AND  TRADING 

94.    METHODS  OF  MARKETING' 

I.      METHODS   OF   SALE 

In  the  early  stages  of  our  industrial  history,  sales  were  made 
in  bulk.  The  purchaser  saw  the  actual  goods  before  the  sale  was 
made. 

Later,  sale  by  sample  appeared.  The  purchaser  bought  goods 
represented  to  be  identical  with  the  sample  he  was  showm.  The  intro- 
duction of  this  method  of  sale  was  necessitated  by  the  widening  of  the 
market  and  was  made  possible  by  improvement  in  commercial  ethics 
and  by  increasing  standardization  of  the  product.  The  purchaser 
must  have  confidence  not  only  in  the  honest  intention  of  the  producer 
to  furnish  goods  identical  with  the  sample,  but  also  in  his  ability  to 
produce  identical  goods.  Hence,  increasing  uniformity  in  product 
through  machine  methods  of  manufacture  was  a  factor  in  the  increase 
of  sale  by  sample. 

Sale  by  description  is  the  most  modern  development  in  distri- 
bution. An  even  higher  ethical  standard  is  required  than  for  sale  by 
sample.  Moreover,  sale  by  description  requires  a  higher  level  of 
general  intelligence  than  sale  in  bulk  or  sale  by  sample.  Sale  by 
description  in  its  modem  development  is,  in  a  sense,  a  by-product  of 
the  printing  press. 

All  three  methods  of  sale  are  in  use  in  modern  commercial  life. 
The  consumer  still  purchases  a  large  part  of  the  commodities  which  he 
uses  under  a  system  of  sale  in  bulk.  He  sees  the  goods  before  he  buys 
them.  The  middleman,  buying  in  larger  quantities,  generally  pur- 
chases from  sample.  But  sale  by  description  becomes  each  year  of 
increasing  importance  at  every  stage  in  the  system  of  distribution. 
Even  where  the  purchaser  actually  sees  a  sample  or  the  goods  them- 
selves before  the  sale  is  concluded,  the  method  of  sale  by  description 
has  in  many  cases  previously  been  used  to  create  in  him  a  demand  for 
the  commodity. 

'Adapted  from  A.  W.  Shaw,  "Some  Problems  in  Market  Distribution," 
Quarterly  Journal  of  Economics,  XXVI,  721-51  (August,  1912). 

[See  also  Selection  102,  for  a  discussion  of  "Advertising  and  Demand"  by 
the  same  author  — Editors.) 

340 


MARKETS  AND  TRADING  341 

n.      AVAILABLE  AGENCIES  FOR   SELLING 

As  selling  is  the  initial  step  in  distribution,  it  is  necessary  to  con- 
sider the  agencies  for  selling  available  to  the  merchant-producer. 
There  are  three  general  agencies  to  be  considered.  These  are  (i) 
middlemen,  (2)  the  producer's  own  salesman,  and  (3)  advertising, 
direct  and  general.  The  business  man  faces  the  problem  of  what 
agency  or  what  combination  of  agencies  is  the  most  efficient  machinery 
for  the  distribution  of  his  particular  commodity. 

The  method  of  sale  adopted  will  largely  govern  the  choice  of  agency 
to  be  employed.  If  the  sale  is  to  be  in  bulk,  the  purchaser  seeing  the 
actual  goods  before  the  purchase  is  made,  distribution  through  a  series 
of  middlemen  is  generally  most  feasible.  However,  such  sale  in  bulk 
through  the  producer's  own  salesmen  is  possible  in  some  cases.  Small 
household  appliances  are  often  sold  in  this  manner  by  door-to-door 
salesmen. 

If  sale  by  sample  is  the  general  method  adapted  to  the  commodity 
in  question,  middlemen  or  salesmen  will  often  be  the  more  desirable 
agencies.  Many  commodities  are  distributed  through  middlemen, 
the  sale  at  each  stage  in  the  process  being  by  sample  saVe  for  the  final 
stage  from  retailer  to  consumer,  where  the  sale  is  in  bulk.  Direct 
salesmen,  perhaps  in  the  majority  of  cases,  sell  from  sample.  And 
even  selling  by  direct  advertising  alone  is  in  some  cases  adapted  to  a 
method  of  sale  by  sample.  Thus  the  distributer  by  mail  of  a  com- 
modity which  is  not  bulky  may  enclose  in  his  direct  advertising 
material  a  sample  of  the  commodity. 

Where  sale  by  description  is  used  exclusively,  advertising,  direct 
or  general,  is  Hkely  to  be  the  most  efficient  agency.  Yet  here  again  it 
is  possible,  though  generally  not  economical,  to  distribute  a  commodity 
through  a  series  of  middlemen  and  yet  the  sale  at  each  stage  be 
accompHshed  by  description.  And  the  use  of  salesmen  in  selling 
by  description  is  common,  as  where  heavy  machinery  is  sold  by 
the  use  of  photographs,  or  hardware  and  like  commodities  from 
catalogues. 

The  number  of  possible  combinations  of  methods  and  agencies 
renders  the  problem  of  the  producer-merchant  an  intricate  one.  It 
will  be  seen  that  he  has  a  difficult  task  in  analyzing  the  market 
with  reference  to  his  goods,  and  in  working  out  that  combination  of 
methods  and  agencies  which  will  give  him  the  most  efficient  system 
of  distribution.  ' 


34^  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in.      THE   MIDDLEMAN   IN   DISTRIBUTION 

The  middleman  is  a  by-product  of  a  complex  industrial  organiza- 
tion. Chart  I  shows  in  rough  outline  the  evolution  of  the  middleman 
from  the  early  period  when  producer  dealt  directly  with  consumer  to 
the  appearance  of  the  orthodox  type  of  distribution  (late  in  the 
eighteenth  century  and  in  the  first  quarter  of  the  nineteenth  century) 
when  a  compUcated  series  of  middlemen  existed.  It  should  be  noted 
that  this  chart  represents  the  typical  case  of  the  domestic  product 
rather  than  that  of  imported  commodities. 

In  the  more  primitive  barter  economy,  the  producer  deals  directly 
with  the  consumer,  and  middlemen  take  no  part  in  the  transaction. 
In  the  mediaeval  period,  as  the  handicrafts  become  specialized  occupa- 
tions under  a  town  market  regime,  the  producer  is  a  retailer  and  sells 
directly  to  the  consumers.  Then  as  the  market  widens,  a  division  of 
labor  is  necessary  and  the  merchant  appears  as  an  organizer  of  the 
market.  The  handicraftsman  becomes  a  steady  worker,  no  longer 
concerning  himself  with  selling.  He  becomes  in  many  cases  practi- 
cally an  employee  of  the  merchant-retailer,  who  provides  the  stock 
and  bears  the  risk.  The  merchant  takes  the  finished  goods  from  the 
producer  and  sells  them  to  the  consumer. 

Steadily  the  market  widens  until  we  find  a  national  market.  The 
merchant  is  no  longer  a  single  intermediary  between  the  producer  and 
the  consumer.  The  merchant  who  takes  the  goods  from  the  producer 
disposes  of  them  to  retail  merchants  who  in  turn  distribute  them  to 
the  consumer.  After  a  long  period,  we  find  the  producers  gradually 
strengthening  their  financial  position,  and  freeing  themselves  from  the 
control  of  a  single  merchant.  They  become  merchant-producers. 
They  assume  the  burden  of  production,  and  dispose  of  the  product  to 
various  wholesalers  who  in  turn  sell  to  retailers,  and  they  to  the 
consumers.  As  a  world-market  appears,  the  producer  disposes  of  a 
part  of  his  product  to  the  export  merchant. 

In  the  early  days  of  the  factory  system,  shown  in  Chart  II,  we 
find  that  the  producers  have  lost  their  character  as  merchants  and  are 
devoting  themselves  to  the  problems  of  production.  The  pressure  on 
production  has  continued,  and  with  the  increasing  intricacy  of 
industry  producers  have  found  it  necessary  to  concentrate  their 
attention  on  production.  The  selling  agent  appears  as  a  link  in  the 
chain  of  distribution  to  relieve  the  producer  of  the  task  of  selling  his 
product.     The  selling  agent  undertakes  to  sell  the  entire  output  of  the 


MARKETS  AND  TRADING 


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344  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

producer,  distributes  it  among  wholesalers,  who  in  turn  distribute  it 
to  retailers,  and  the  retailers  to  the  consuming  public. 

This  may  be  termed  the  orthodox  type  in  distribution,  a  type 
almost  universal  in  the  early  decades  of  the  nineteenth  century,  and 
still  common,  as  in  the  textile  industry  in  New  England. 

Just  as  the  long  period  of  development  from  a  system  of  barter 
economy  to  the  early  decades  of  the  factory  system  showed  a  con- 
tinuous tendency  for  increase  in  the  number  of  middlemen  intervening 
between  the  producer  and  the  consumer,  so  recent  years  have  shown 
a  growing  tendency  to  decrease  the  number  of  successive  steps  in 
distribution.  The  tendency  is  apparent  in  nearly  every  industry  and 
has  been  clearly  marked  in  recent  years. 

Under  the  orthodox  type  of  distribution,  with  numerous  middle- 
men intervening  between  the  producer  and  the  consumer,  the  producer 
is  in  a  position  of  disadvantage.  The  fixed  charges  under  which  he 
operates  render  it  necessary  that  he  operate  continuously.  The  outlet 
for  his  goods,  however,  is  controlled  by  middlemen.  Hence  the 
middleman  is  able  to  exert  pressure  upon  the  producer  and  force  a 
narrowing  of  his  margin  of  profit.  To  free  themselves  from  this 
pressure,  the  stronger  merchant-producers  seek  to  go  around  the 
immediate  middlemen,  thus  decreasing  the  number  of  steps  in  the 
system  of  distribution. 

Chart  II  is  an  attempt  to  show  diagrammatically  the  development 
of  this  tendency  to  decrease  the  number  of  successive  middlemen. 
By  the  use  of  salesmen  going  directly  to  the  wholesaler  and  by  adver- 
tising directed  to  the  retailer  the  producer  has  displaced  the  selling 
agent  in  many  cases.  Sometimes  the  advertising  is  directed  not  only 
to  the  retailers  but  also  to  the  wholesalers.  To  strengthen  still 
further  his  position  the  producer  will  often  use  advertising  directed  to 
the  consumer  to  build  up  a  demand  for  his  product.  This  involves 
the  necessity  fox  a  product  differentiated  by  trade  mark,  brand,  or 
trade  name.  When  the  producer  thus  directly  builds  up  a  demand 
among  consumers,  he  often  takes  the  further  step  of  sending  his  sales- 
men to  the  retailer,  thus  omitting  the  wholesaler  entirely  from  his 
system  of  distribution. 

The  most  extreme  step  in  the  process  is  the  complete  elimination 
of  middlemen,  and  the  sale  direct  from  the  merchant-producer  to  the 
consumer,  either  by  advertising  alone  or  by  salesmen  supplemented 
by  advertising.  Manufacturers  of  specialties  have  largely  adopted 
this  scheme  of  distribution  and  the  enormous  growth  of  the  mail-order 


MARKETS  AND  TRADING 


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346  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

business  in  recent  years  gi\-es  evidence  that  in  some  lines  of  distribution 
there  are  economies  in  this  system. 

The  tendency  to  decrease  the  number  of  middlemen  is  one  of  the 
most  characteristic  features  of  modern  distribution.  It  promises  to 
show  much  greater  development  in  the  future  if  present  economic 
conditions  substantially  continue.  The  attempts  of  associations  of 
retailers  to  check  the  growth  of  direct  selling  have  thus  far  not  been 
successful.  In  their  desire  to  force  the  manufacturer  to  dispose  of  his 
product  through  regular  trade  channels  they  sometimes  invoke  the 
boycott.  But  our  common  state  statutes,  prohibiting  combinations 
in  restraint  of  trade,  prevent  effective  agreements  to  boycott  pro- 
ducers who  sell  direct.  And  the  advantages  of  direct  seUing  in  some 
lines  render  the  producer  wiUing  to  incur  the  disfavor  of  the  trade. 

To  understand  what  seems  to  be  a  present  tendency  to  go  around 
the  middleman  as  well  as  to  consider  the  problem  of  the  merchant- 
producer  with  reference  to  the  use  of  middlemen  in  distribution,  it  is 
necessary  to  analyze  the  fimctions  performed  by  the  middleman. 
Roughly  the  general  functions  may  be  listed  as  follows: 

1.  Sharing  the  risk. 

2.  Transporting  the  goods. 

3.  Financing  the  operations. 

4.  Selling  (communication  of  ideas  about  the  goods). 

5.  Assembling,  assorting,  and  reshipping. 

These  fimctions  were  at  first  taken  over  by  areas;  that  is,  each 
successive  middleman  in  the  series  took  over  a  part  of  each  function. 
Each  took  the  risk  of  destruction  of  the  goods  while  he  held  title. 
Each  took  the  risk  of  credit  losses.  Each  took  a  share  in  the  trans- 
portation of  the  goods  along  the  route  from  the  producer's  stockroom 
to  the  hands  of  the  consumers.  Each  took  a  part  in  financing  the 
entire  operation.  Each  had  a  part  in  the  selHng,  disposing  of  the  goods 
he  purchased  to  succeeding  middlemen  and  finally  to  the  consumer. 
And  each  finally  took  a  part  in  assembling,  assorting,  and  reshipping 
the  goods  to  make  them  physically  available  to  the  consumer. 

But  at  a  relatively  early  date  a  taking-over  of  these  functions  by 
kind  instead  of  by  area  appeared.  Today  we  have  what  may  be 
termed  functional  middlemen  in  the  insurance  companies,  direct 
transportation  companies,  and  banks. 

The  insurance  company  is  in  a  real  sense  a  middleman  in  distri- 
bution. When  it  insures  the  producer  against  loss  of  goods  by  fire, 
against  credit  losses,  and  the  like,  it  is  taking  over  the  function  of  risk 


MARKETS  AND  TRADING  347 

formerly  shared  by  successive  middlemen.  Today  the  insurance 
company  will  assume  practically  the  entire  element  of  risk.  It  is 
possible,  for  instance,  for  a  large  department  store  to  insure  against 
unseasonable  holiday  weather.  The  insurance  company  differs  from 
the  ordinary  middleman  in  that  it  takes  over  one  function  as  such 
rather  than  portions  of  a  number  of  functions. 

So  improvements  in  direct  transportation  have  enabled  the  pro- 
ducer to  turn  to  a  functional  middleman  to  convey  the  goods  to  the 
consumer.  The  transportation  companies  and  the  express  companies 
are  in  a  true  sense  middlemen  in  distribution,  though  they  perform 
but  one  of  the  functions  formerly  shared  by  the  successive  middlemen 
who  took  over  functions  by  area.  The  physical  conveyance  of  the 
goods  to  the  consumer  was  formerly  one  of  the  most  important  func- 
tions performed  by  a  series  of  middlemen. 

So  the  function  of  financing  the  operations  has  largely  been  taken 
from  the  regular  middleman.  In  former  times  the  middleman  took 
his  part  in  the  burden  of  finance  in  addition  to  his  other  functions.  In 
most  industries  today  the  bank,  as  a  functional  middleman,  cares  for 
the  element  of  finance  in  the  operations  of  distribution.  By  advancing 
on  goods  and  on  commercial  paper,  it  largely  absorbs  the  function  of 
finance  in  distribution. 

Another  development  has  lessened  the  dependence  of  the  producer 
upon  the  middleman  for  financial  assistance.  The  application  of  the 
corporate  form  to  industrial  organization  has  made  it  possible  to  draw 
together  larger  bodies  of  operating  capital  and  hence  to  place  the 
producer  in  a  stronger  financial  position. 

As  a  result  of  the  development  of  functional  middlemen,  ready  to 
take  over  the  fimctions  of  sharing  the  nsk,  transporting  the  goods,  and 
financing  the  operations,  the  importance  of  the  middleman  for  these 
functions  has  diminished.  There  remain  the  function  of  selling  (the 
communication  of  ideas  about  the  goods)  and  the  fimction  of  assem- 
bling, assorting,  and  reshipping.  It  is  as  to  these  functions  that  the 
middleman  is  of  most  importance  today. 

IV.      THE   SALESMAN   AS   AN   AGENCY  IN  DISTRIBUTION 

A  less  detailed  analysis  than  was  necessary  in  the  case  of  the 
middleman  will  be  required  for  the  salesman.  The  primary  function 
for  which  salesmen  are  used  is  the  communication  of  ideas  about  the 
goods  to  the  prospective  purchaser;  that  is,  the  selling  function. 

The  salesman,  in  the  sense  of  a  man  sent  to  prospective  purchasers, 


348  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

generally  sells  from  sample.  In  some  few  cases  the  sale  may  be  in 
bulk,  the  salesman  showing  the  prospective  purchaser  the  actual  goods 
to  be  purchased.  And  as  has  been  suggested,  the  salesman  may  sell 
entirely  by  description,  merely  showing  the  prospective  purchaser 
pictures  of  the  goods,  as  in  selling  from  catalogue. 

When  the  producer  finds  it  desirable  to  go  around  a  middleman 
and  to  sell  directly  to  a  subsequent  middleman  or  to  the  consumer,  he 
may  use  for  the  selling  function  either  his  own  salesmen  or  advertis- 
ing, or  the  two  in  combination. 

When  one  analyzes  the  salesman  as  an  agency  for  sale  by  descrip- 
tion in  contrast  with  advertising,  direct  or  general,  he  must  take  into 
account  the  human  element  again.  Advertising  has  the  obvious 
advantage  that  you  can  convey  exactly  the  idea  you  wish  to  convey 
in  the  form  you  wish  to  convey  it.  It  lacks,  however,  the  personality 
and  the  timeliness  of  the  salesman's  visit;  it  lacks  adaptability,  the 
opportunity  to  use  the  mood  of  the  customer  and  all  the  various 
human  factors  that  make  the  salesman  effective. 

More  than  this,  when  the  salesman  has  aroused  in  the  prospective 
purchaser  a  demand  for  the  goods  in  question,  he  is  on  the  ground  to 
close  the  sale  at  once.  In  the  case  of  advertising,  the  demand  aroused 
must,  in  general,  be  strong  enough  to  lead  the  prospective  purchaser 
to  go  to  some  trouble  before  he  obtains  the  actual  goods.  Hence  a  less 
intensive  demand  may  be  more  immediately  effective  in  the  case  of  the 
salesman  than  when  advertising  is  concerned. 

It  should  here  be  emphasized  that  the  analogy  between  direct 
salesmen  and  advertising  is  very  close.  Each  agency  is  largely  used  to 
enable  the  producer  to  take  over  one  function  of  the  middleman,  that 
is,  the  selling  function.  And  in  each  case  the  root  idea  is  the  same. 
The  producer  seeks  to  communicate  to  the  prospective  purchaser 
through  one  or  the  other  agency,  or  a  combination  of  the  two,  such 
ideas  about  the  goods  as  will  create  a  conscious  demand  for  them. 
The  direct  salesman  and  advertising  are  different  modes  of  accom- 
plishing the  same  end. 

V.      ADVERTISING   AS   AN   AGENCY   IN   DISTRIBUTION 

Advertising  in  the  modem  commercial  sense  is  of  comparatively 
recent  development.  Only  in  the  middle  of  the  nineteenth  century 
did  it  commence  to  be  of  real  importance  in  the  commercial  world.  It 
is  a  necessary  consequence  of  sale  by  description.  So  long  as  the 
prevailing  code  of  commercial  ethics  made  sale  in  bulk  the  only 


MARKETS  AND  TRADING  349 

practical  method,  the  middleman  was  an  indispensable  selling  agency. 
But  now  that  the  general  average  of  intelligence  enables  the  prospec- 
tive purchaser  to  gain  an  idea  of  the  goods  without  seeing  them  and 
without  seeing  a  sample,  and  now  that  the  prevailing  code  of  business 
ethics  is  such  that  the  prospective  buyer  feels  that  he  may  rely  upon 
the  description  given  him,  advertising  becomes  in  many  lines  the  most 
economical  agency  for  the  exercise  of  the  selling  function.  Even 
where  the  actual  sale  is  made  by  salesmen  from  sample,  advertising  is 
used  as  a  supplementary  agency  to  build  up  a  demand  which  the 
salesman  crystallizes.  And  sale  by  advertising  alone  may  be  applied 
today  even  where  the  purchaser  demands  to  see  the  goods  before 
concluding  the  purchase,  by  sending  the  goods  to  him  on  approval. 

Not  only  is  the  modern  development  of  advertising  dependent  upon 
the  possibility  of  sale  by  description,  but  it  also  depends  upon  the 
increasing  differentiation  of  commodities  by  trade  marks,  brands,  and 
trade  names.  The  producer  cannot  profitably  convey  to  the  consumer 
ideas  about  a  certain  food  product  which  will  build  up  a  demand  for 
that  product,  unless  the  consumer  is  able  to  identify  the  particular 
product  when  he  goes  into  the  grocery  store  to  purchase  it. 

Advertising,  in  the  broad  sense,  includes  not  only  selling  letters 
and  circulars,  but  newspaper  and  periodical  advertising,  billboards 
and  window  cards,  electric  signs,  street-car  advertising,  catalogues, 
and  all  the  varied  forms  of  modem  commercial  publicity.  A  rough 
classification  is  made  between  general  and  direct  advertising.  General 
advertising  includes  newspaper  and  magazine  advertising,  billboards, 
electric  signs,  street-car  advertising  and  the  like,  aimed  at  the  general 
public  or  some  section  of  it.  Direct  advertising  is  used  in  reference  to 
the  sending  of  selling  letters,  circulars,  or  catalogues  to  the  persons 
whose  names  appear  on  a  mailing  list  and  to  reach  whom  the  material 
sent  is  specially  adapted. 

VI.      ANALYSIS   OF  THE   MARKET 

The  problem  presented  by  the  United  States  as  a  consuming 
market  is  a  complex  one.  Here  are  ninety-odd  million  people  dis- 
tributed over  an  area  of  more  than  3,000,000  square  miles  (excluding 
Alaska).  Some  are  gathered  in  the  large  cities,  where  millions  jostle 
elbows.  Some  are  scattered  over  great  areas  with  considerable 
distances  between  them  and  their  neighbors.  Some  daily  pass 
hundreds  of  retail  stores;  some  must  ride  miles  to  reach  the  nearest 
store.    Wide  extremes  in  purchasing  power  exist.     Millions  have  a 


3SO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

purchasing  power  scarcely  sufficient  to  obtain  for  themselves  the  barest 
necessities  of  life.  A  few  can  satisfy  the  most  extravagant  whims  of 
the  human  imagination.  Between  these  extremes  lie  all  degrees  of 
purchasing  power,  the  number  in  each  class  becoming  greater  as  you 
descend  in  the  scale  of  purchasing  power. 

Their  wants  are  as  varied  as  their  purchasing  power.  Environ- 
ment, education,  social  custom,  individual  habits,  and  all  the  varia- 
tions in  body  and  mind  tend  to  render  human  wants  diverse.  In  each 
individual  there  are  certain  conscious  needs  being  constantly  gratified 
by  the  purchase  of  goods  produced  for  such  gratification.  Then  there 
are  the  conscious  needs  which  go  ungratified  because  of  the  limitations 
upon  purchasing  power  and  the  existence  of  other  needs  of  greater  felt 
importance.  And  then  there  are  the  unformulated,  subconscious 
needs  which  fail  of  expression  because  the  individual  is  ignorant  of  the 
existence  of  goods  which  would  gratify  them. 

The  business  man  must  first  realize  the  intricacy  of  the  problems 
he  has  to  solve.  He  must  analyze  his  market.  The  market  splits 
up  into  economic  and  social  strata,  as  well  as  into  geographic  sections. 
The  distributer  cannot  disregard  the  geographic  distribution  of  the 
consuming  public.  He  may  be  able  to  sell  profitably  by  salesmen 
where  the  population  is  dense,  while  such  method  of  sale  would  be 
unprofitable  in  a  region  where  there  is  a  sparse  population.  If  he 
bases  a  judgment  upon  the  average  cost  of  selling  by  salesmen  for  the 
whole  market,  he  may  well  go  wrong,  since  the  average  might  show 
that  the  use  of  such  an  agency  was  on  the  whole  profitable,  while  yet 
in  some  sections  entering  into  the  average  the  use  of  salesmen  was 
actually  unprofitable.  Again,  it  might  be  economical  for  the  dis- 
tributer to  establish  his  own  branch  stores  in  the  denser  urban  centers, 
while  in  the  sparsely  populated  regions  he  could  most  profitably 
distribute  his  product  through  the  regular  channels. 

If,  then,  a  sound  system  of  distribution  is  to  be  established,  the 
business  man  must  realize  that  each  distinct  geographic  section  is  a 
separate  problem.  The  whole  market  breaks  up  into  differing  regions. 
Equally  important  is  a  realization  of  what  may  be  termed  the 
market  contour.  The  market,  for  the  purposes  of  the  distributer,  is 
not  a  level  plain.  The  distributer  of  a  staple  hat  at  $3 .00  appeals  to 
different  economic  and  social  strata,  faces  different  considerations,  and 
finds  different  selling  methods  necessary,  as  compared  with  distribu- 
ters seUing  a  $5.00  trade-marked  hat,  or  those  distributers  selling 
$4 .  00  or  $6 .  00  trade-marked  hats.     Differences  in  economic  and  social 


MARKETS  AND  TRADING  351 

strata  to  be  reached  are  as  important  as  diflferences  in  geographic 
location  and  density,  if  a  sound  system  of  distribution  is  to  be  worked 
out. 

Take  the  distributer  who  seeks  to  map  out  a  selling  campaign  for  a 
Catholic  publication.  It  is  essential  that  he  take  into  account  not 
merely  the  geographic  distribution  of  the  Catholic  population  in  the 
United  States,  the  regions  where  it  is  relatively  dense,  and  the  regions 
where  it  constitutes  a  small  element  in  the  population,  but  also  he 
must  take  into  account  the  distribution  of  that  population  through  the 
economic  strata  of  society.  A  method  of  distribution  successful  in 
New  Orleans,  where  the  CathoUc  population  is  dense  and  spread 
through  all  economic  strata  of  society,  might  well  fail  if  applied  u. 
Maine,  where  the  Catholic  population  is  relatively  sparse  and  found 
mostly  in  the  Tower  economic  strata. 

A  careful  analysis  of  his  market,  then,  by  areas  and  by  strata,  is 
the  first  task  of  the  modem  distributer. 

Nor  does  the  merchant-producer  ordinarily  realize  how  intricate  is 
his  problem  as  to  the  agency  or  combination  of  agencies  that  will  be 
most  efl&cient  in  reaching  his  market.  The  business  man  often  adopts 
one  method  and  becomes  an  advocate  of  it,  disregarding  entirely  other 
methods.  While  the  method  adopted  may  be  more  efficient  than  any 
other  single  method,  it  is  apparent  that  a  method  which  is  relatively 
efficient  in  reaching  one  area  may  be  inferior  to  another  method  in 
reaching  another  area.  And  so  a  system  of  distribution  which  has 
proven  very  effective  in  reaching  one  economic  stratum  may  be 
relatively  inefficient  when  employed  to  reach  a  different  economic 
stratum  in  society. 

The  problem,  then,  of  working  out  the  most  effective  combination 
of  agencies  is  a  most  complicated  one.  Each  distinct  area  and 
economic  stratum  must  be  treated  as  a  separate  problem,  and,  more- 
over, the  economic  generalizations  embodied  in  the  law  of  diminishing 
returns  must  be  taken  into  account  in  choosing  that  combination  of 
selling  agencies  which  will  give,  in  the  aggregate,  the  most  efficient 
organization  of  the  market. 


352  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

95.     MARKETING  FARM  PRODUCTS' 

The  simplest  system  of  marketing  is  that  in  which  a  producer 
sells  directly  to  the  consumer  or  to  unassociated  consumers.  There 
is  a  ring  around  each  city  and  town  in  which  may  be  found  agricul- 
tural producers  who  come  directly  into  contact  with  consumers  in 
the  sale  of  products.     The  producer  delivers  in  his  own  wagon. 

If  there  were  co-operative  associations  of  consumers  in  cities 
and  towns  the  delivery  by  the  farmer  directly  to  them  would  be 
more  simple  than  his  present  deliveries  to  consumers  individually. 

TRAVELING   BUYERS 

Distribution  of  farm  products  between  producer  and  consumer 
has  many  variations  of  system. 

Selling  to  buyers  who  come  to  the  farm  is  practiced  in  some 
degree  in  many  parts  of  the  United  States.  Traveling  hucksters  in 
many  regions  go  from  farm  to  farm  gathering  eggs,  butter,  poultry, 
calves,  and  similar  commodities,  which  they  sell  to  shippers,  jobbers, 
or  retail  dealers.  Agents  of  large  merchants  go  to  farms  on  the 
Pacific  coast  to  buy  hops,  to  ranges  in  the  Rocky  Mountains  for  wool, 
to  plantations  in  Louisiana  and  southeastern  Texas  to  bargain  for 
rice,  and  to  the  orchards  of  the  apple-producing  states  east  of  the 
Rocky  Mountains.  The  cattle  buyer  also  is  a  frequent  visitor  at 
many  farms,  especially  where  stock  raising  is  a  secondary  industry. 

GENERAL  MERCHANTS 

One  of  the  most  important  persons  in  the  distribution  of  some 
products  is  the  merchant  of  the  town  or  the  rural  community.  He 
is  often  the  first  receiver  of  such  products  as  eggs,  farm-made  butter, 
poultry,  wool,  hides,  and  sometimes  cotton,  grain,  and  hay.  It  is 
the  custom,  less  so  than  formerly,  for  a  local  merchant  to  credit  a 
planter  of  cotton  or  rice,  or  his  tenants,  with  supplies  for  a  crop  year, 
and  to  take  a  lien  upon  a  growing  crop  to  cover  the  value  of  the 
merchandise  thus  sold.  In  such  a  case  it  is  frequently  the  practice 
that  the  crop,  when  ready  for  market,  is  turned  over  to  the  merchant 
by  the  planter  or  tenant,  who  receives  the  difference  between  his 
debt  and  the  proceeds  from  the  crop.  The  importance  of  the  country 
merchant  as  a  distributing  factor  in  some  regions  is  diminishing,  for 

•  Adapted  from  U.S.  Department  of  Agriculture,  Report  No.  98,  Systems  of 
Marketing  Farm  Products  and  Demand  for  Such  Products  at  Trade  Centers  (191 3), 
pp.  10-14. 


MARKETS  AND  TRADING  353 

he  has  been  supplanted  to  a  greater  or  less  degree  by  dealers  In  special 
products. 

LOCAL   BUYERS   OF   SPECIAL   PRODUCTS 

In  the  regions  where  grain  is  the  staple  product  the  tendency  has 
been  for  the  storekeeper  to  be  displaced  by  the  grain  dealer  and  the 
local  elevator  man.  Among  other  examples  of  local  buyers  of  special 
produce  are  the  California  fruit  packer,  who  buys  from  growers; 
the  egg  and  poultry  shipper  in  the  Middle  West,  whose  purchases 
are  made  from  country  merchants  and  who  ships  by  carload  lots  to 
wholesale  dealers;  the  San  Francisco  (Cal.)  wool  merchant,  who  buys 
on  the  range  and  sells  in  the  East;  the  poultry  packer  in  the  North 
Central  states,  who  buys  live  fowls,  slaughters  them,  and  consigns 
to  eastern  cities;  and  the  "track  buyers"  of  watermelons  in  the 
region  near  San  Antonio,  Tex.,  of  peaches  in  Georgia,  and  of  hogs 
in  the  corn  belt. 

COMMISSION   DEALERS 

The  individual  farmer  who  ships  his  products  by  rail  or  water  to 
a  market  and  does  not  sell  directly  to  consumers  must  sell  through, 
or  to,  middlemen.  They  commonly  sell  through  commission  mer- 
chants, but  to  some  extent  sell  directly  to  wholesale  dealers,  and,  also, 
to  retail  dealers.  The  results  to  the  farmer  of  selling  through  middle- 
men are  both  good  and  bad. 

The  conunission  dealer  is  the  agent  through  whom  a  large  amount 
of  produce  is  sold  for  farmers  or  country  shippers.  He  usually  repre- 
sents the  seller,  but  there  are  instances  where  he  serves  as  agent  of 
the  buyer,  as  in  some  sales  of  live  stock  to  distant  buyers  or  in  the 
purchase  of  Pacific  coast  hops  for  eastern  dealers. 

In  addition  to  serving  as  agent  in  making  a  sale,  a  commission  man 
may  advance  money  to  a  producer  or  to  a  country  buyer,  as  when  a 
live-stock  commission  firm  loans  money  to  feeders  or  when  a  grain- 
commission  firm  supplies  a  local  grain  dealer  with  sufficient  cash  to 
begin  his  season's  purchases.  Another  phase  of  commission  dealing 
is  that  engaged  in  by  rice  and  cotton  factors,  who  advance  money  on 
crop  liens,  and  to  whom  these  products  are  frequently  consigned  to 
be  sold  on  commission.  In  some  states,  for  instance,  in  South  Caro- 
lina, banks  are  reported  to  be  taking  the  place  of  the  cotton  factor 
in  making  loans,  and  the  presence  of  buyers  and  neighboring  mills 
enables  planters  sometimes  to  market  their  cotton  without  the  aid  of 
factors.    Another  class  of  factors  are  those  in  the  Baltimore  tobacco 


354  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

trade,  who  receive  consignments,  for  instance,  from  farmers  in  Mary- 
land and  Ohio,  and  who  sell  to  exporters, 

DIRECT   SALES   WITHOUT   AID   OF   MIDDLEMEN 

Common  instances  of  the  producer's  selling  direct  and  delivering 
to  the  door  of  the  consumer  occur  in  the  marketing  of  milk,  butter, 
eggs,  poultry,  fruits,  vegetables,  hay,  and  other  farm  products.  Milk 
producers  in  the  neighborhood  of  Erie,  Pa.,  through  their  organiza- 
tion, deliver  milk  direct  to  consumers.  Numerous  poultry  raisers 
sell  exhibition  stock  direct  to  other  poultry  raisers.  Eggs  for  hatch- 
ing are  also  sold  in  this  way.  Registered  cattle  are  often  sold  at 
auctions,  held  periodically  by  the  owners.  Retail  sales  of  fruit, 
vegetables,  poultry,  eggs,  and  dairy  products  direct  by  producers 
to  consumer  are  made  also  in  public  market  places. 

In  a  sense,  a  mill  or  a  factory  may  be  regarded  as  a  consumer. 
An  old  instance  of  the  producer's  selling  in  wholesale  lots  direct  to 
the  consumer  is  that  of  the  farmer  taking  his  grain  to  a  near-by  mill. 
A  sale  of  sugar  beets  to  a  neighboring  factory  is  another  example  of 
direct  bargaining  between  producer  and  consumer;  so  is  the  sale  and 
delivery  of  milk  to  a  creamery,  apples  to  an  evaporating  establishment, 
and  fruits  and  vegetables  to  neighboring  canning  houses. 

TRANSFER  THROUGH  ONE  MIDDLEMAN 

A  large  number  of  transactions  are  made  in  which  only  one 
middleman  assists  in  the  transfer  from  producer  to  consumer.  A 
common  example  is  that  of  a  town  merchant  who  buys  produce  from 
farmers  and  sells  it  to  consumers. 

Among  the  other  instances  of  a  single  middleman  intervening 
between  producer  and  consumer  may  be  noted  the  commission  man 
at  a  large  market  who  receives  consignments  of  live  stock  from 
farmers  and  sells  to  packers;  the  factors  to  whom  the  planter  con- 
signs his  rice  or  cotton  and  from  whom  purchases  are  often  made  by 
millers;  the  warehouseman  who  manages  the  sale  of  a  Virginia 
planter's  tobacco;  and  the  "line"  or  system  of  elevators  which  buys 
grain  from  farmers  and  sells  to  millers.  Pennsylvania  tobacco  is 
often  bought  at  the  farm  by  a  dealer  who  sells  to  manufacturers. 

It  is  common  practice  in  a  number  of  cities — for  instance.  New 
York,  N.Y.,  Philadelphia,  Pa.,  and  Washington,  D.C. — for  milk  to 
be  handled  by  one  middleman,  namely,  the  city  retailer,  who  buys 
direct  from  the  producer.     A  considerable  part  of  the  supply  of  New 


MARKETS  AND  TRADING  355 

York  City  is  delivered  at  country  shipping  points  to  stations  or 
"creameries"  owned  by  New  York  dealers  who  sell  in  the  city  at 
retail. 

An  organization  which  brings  the  grain  producer  nearer  the  great 
mills  is  the  farmers'  elevator.  The  plan  of  its  operation  has  some 
features  similar  to  that  of  the  wool  warehouses  of  Chicago  and 
Omaha.  Farmers  co-operate  in  building  an  elevator  and  in  employing 
a  manager. 

MARKETING   THROUGH  TWO   MIDDLEMEN 

The  intervention  of  two  middlemen  between  producer  and  con- 
sumer is  a  common  occurrence.  The  farmer  may  consign  to  a  distant 
commission  man  or  sell  to  a  local  dealer,  and  the  next  transaction  of 
the  series  may  be  the  sale  to  a  retail  merchant  whose  customers  are 
consumers.  A  common  way  of  marketing  live  stock  is  for  the  farmer 
to  sell  to  a  buyer  who  ships  to  a  commission  merchant  at  a  large  pack- 
ing center,  where  the  animals  are  sold  frequently  to  packers.  Fruits 
and  vegetables  are  marketed  often  through  the  aid  of  two  middlemen, 
the  city  commission  dealer  and  the  retail  merchant.  Two  middlemen 
*  are  involved  also  in  some  sales  of  produce  made  by  farmers'  co-opera- 
tive societies;  the  first,  unless  the  sales-manager  of  a  society  be  classed 
as  a  middleman,  being  the  wholesale  or  the  commission  dealer,  and  the 
second  the  retail  merchant. 

TRANSACTIONS   INVOLVING  THREE   OR   MORE   MIDDLEMEN 

A  series  of  three  middlemen  may  include,  first,  the  local  buyer  or 
shipper;  second,  the  commission  dealer  or  the  wholesale  merchant; 
and  third,  the  retail  merchant.  Watermelons  from  the  region  of 
San  Antonio,  Tex.,  are  reported  to  be  distributed  in  considerable 
quantities  through  such  a  series  of  dealers.  Traveling  hucksters  in 
Missouri  buy  poultry  from  farmers  and  sell  occasionally  to  merchants 
or  to  commission  firms,  who  in  turn  include  among  their  customers 
some  retail  dealers.  Apple  dealers  in  this  country  purchase  the  fruit 
from  growers  and  sell  to  United  States  agents  of  German  importers. 
The  third  in  this  series  of  middlemen  is  the  retail  dealer  in  Germany. 

In  the  sale  of  fruit  by  auction,  as  is  common  in  large  cities  east  of 
the  Mississippi  River,  the  auctioneer  is  an  additional  middleman. 
He  may  sell  for  a  commission  dealer  to  whom  the  consignment  may 
have  been  made  by  a  country  buyer;  and  the  purchaser  at  such  an 
auction  may  be  a  jobber,  who  in  turn  sells  to  a  retail  merchant.  Five 
middlemen  are  thus  concerned  in  such  a  transaction. 


356  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

96.     RETAIL  DISTRIBUTION  OF  FARM  MACHINERY' 

Over  95  per  cent  of  all  the  fann  machinery  used  in  the  country  is 
purchased  from  the  local  implement  dealer.  The  system  of  direct 
selling  by  the  manufacturer  to  the  farmer  has  not  been  extensively 
developed  in  this  branch  of  industry. 

When  factories  first  began  to  take  over  the  work  of  the  local  black- 
smith and  wagon-maker  in  supplying  the  needs  of  the  farmer,  it 
became  necessary  to  establish  agencies  with  local  storekeepers.  As 
retail  trade  became  differentiated,  implements  and  hardware  were 
commonly  sold  by  the  same  dealer,  and  indeed  still  are  in  some  parts 
of  the  country.  Later,  as  implements  increased  in  variety  and  the 
trade  became  further  developed,  in  many  sections  the  handling  of 
farm  machinery  grew  into  a  distinct  business.  These  dealers  gen- 
erally took  up  also  the  sale  of  wagons  and  other  vehicles  used  by  the 
farmer,  and  are  therefore  usually  referred  to  as  implement  and  vehicle 
dealers.  From  the  beginning  the  dealer  was  an  active  force  in  push- 
ing the  sale  of  machines;  he  provided  space  for  the  storage  and 
exhibition  of  machines;  he  showed  farmers  how  machines  should  be 
operated;  and  he  was  able  to  furnish  information  to  the  manufac- 
turer as  to  the  reliability  of  prospective  customers  among  the  farmers 
in  his  vicinity. 

The  terms  of  the  agreement  under  which  the  dealer  handles  the 
products  of  the  manufacturer  of  farm  machinery  are  usually  defined 
in  a  printed -contract  furnished  by  the  manufacturer.  This  agreement 
names  the  conditions  under  which  the  dealer  undertakes  to  handle 
the  goods  and  under  which  the  manufacturer  agrees  to  furnish  them 
It  enumerates  the  kind  or  kinds  of  machinery  to  be  handled  and  pro- 
vides for  prices,  terms  of  payment,  discounts,  point  from  which 
dealer  is  to  pay  freight,  and  such  other  matters  as  may  be  considered 
necessary  under  the  particular  form  of  contract  employed.  Some- 
times it  also  specifies  the  quantity  of  machines  to  be  purchased,  but 
frequently  leaves  this  to  be  determined  later.  Such  contracts  are 
usually  referred  to  as  agency  contracts,  although  in  form  they  may 
be  either  commission  contracts  or  contracts  of  sale.  Under  the  former 
the  dealer  is  nominally  the  commission  agent  of  the  manufacturer, 
title  to  the  goods  or  to  the  proceeds  remaining  in  the  latter  until 
settlement,  the  dealer  receiving  the  difference  between  the  wholesale 
price  of  the  manufacturer  and  the  price  paid  by  the  retail  purchaser 

'  Adapted  from  the  Report  of  the  United  Staiis  Commissioner  of  Corporations 
an  the  International  Harvester  Co.  (1913),  pp.  291-94. 


MARKETS  AND  TRADING  357 

as  his  commission  or  compensation.  Under  the  sale  contract  the 
dealer  buys  the  goods  outright  and  becomes  responsible  for  payment, 
although  many  contracts  of  this  sort  contain  provisions  intended  to 
protect  the  manufacturer  in  case  the  dealer  is  threatened  with  insolv- 
ency. Some  manufacturers  use  both  kinds  of  contract  with  various 
modifications  in  particular  terms. 

The  period  of  time  usually  covered  by  these  contracts  is  one  year. 
The  contract  is  submitted  by  the  manufacturer's  salesmen  to  the 
dealer  before  the  opening  of  the  season  which  it  covers,  usually  the  fall 
before,  or  at  some  other  time  before  the  business  of  the  new  season  is 
under  way.  It  is  customary  for  the  contract  to  contain  a  clause 
providing  that  after  it  has  been  signed  by  the  dealer  and  the  manu- 
facturer's representative  it  must  be  approved  by  the  general  agent 
or  some  representative  of  corresponding  responsibility  before  it 
becomes  binding  on  the  manufacturer. 

The  investment  of  the  dealer,  which  is  chiefly  in  his  stock,  varies 
somewhat  according  to  the  form  of  contract  he  has.  His  success 
under  ordinary  conditions,  like  that  of  other  merchants,  depends 
upon  his  ability  to  gauge  the  market  demand  for  the  goods  and  his 
skill  as  a  salesman.  From  time  to  time  he  is  visited  by  the  manu- 
facturer's salesmen  soliciting  orders  under  the  contract.  Except  in 
harvesting  machinery  most  manufacturers  leave  the  work  of  solicit- 
ing farmers'  orders  to  the  dealer  and  his  employees,  so  that  the 
number  of  machines  that  the  dealer  sells  to  farmers  and  the  prices 
received  usually  depend  upon  his  own  efforts. 

Generally  speaking,  the  dealer  does  not  contract  to  handle  more 
than  one  or  two  makes  or  brands  of  any  particular  kind  of  machine, 
and  often  is  not  allowed  to  by  the  manufacturer  whose  goods  he  sells. 
After  selling  the  machines  of  a  particular  make  for  several  years  he 
may  work  up  a  custom  closely  connected  with  that  brand  of  goods. 

At  most  towns  there  are  only  two  or  three  implement  dealers. 
This  fact,  taken  in  connection  with  the  fact  that  few  dealers  handle 
more  than  one  or  two  makes  of  any  one  kind  of  machine,  presents  a 
very  serious  problem  to  manufacturers  of  lines  in  which  there  exist 
a  considerable  number  of  competing  factories.  With  a  limited  number 
of  implement  dealers  in  any  particular  locality  it  is  clear  that  in  some 
towns  some  manufacturers  cannot  secure  the  services  of  a  dealer 
with  an  established  trade.  The  difficulty  of  securing  satisfactory 
dealers  at  such  points  is  often  so  great  that  some  concerns  contract 
with  dealers  whom  other  concerns  consider  imsuitable  credit  risks. 


358  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Even  this  method  of  securing  representation  is  not  free  from  diflB- 
culties;  for  tlie  dealers  themselves  are  organized  into  local,  state  and 
national  associations  the  chief  purpose  of  which  is  to  protect  the  trade 
of  the  retail  dealer  against  any  tendency  on  the  part  of  manufacturers 
or  jobbers  to  sell  direct  to  farmers,  or  to  so-called  "irregular"  dealers. 
It  is,  therefore,  a  great  advantage  in  several  ways  for  the  manu- 
facturers to  contract  with  dealers  having  an  established  trade. 

In  a  few  sections  these  conditions,  among  others,  have  led  some 
makers  of  farm  machinery  to  establish  their  own  retail  stores,  but 
this  method  has  not  assumed  any  special  importance  as  a  means  of 
reaching  the  farmer.  A  few  manufacturers  sell  their  products  by  the 
mail-order  method,  either  directly  or  through  estabUshed  mail-order 
houses. 

The  retail  distribution  of  harvesting  machines,  however,  developed 
certain  peculiar  characteristics.  From  the  time  that  they  began  to 
be  sold  it  was  the  common  practice  for  the  local  blacksmith  or  store- 
keeper to  agree  with  the  manufacturer  to  handle  such  machines  on  a 
consignment  basis,  receiving  as  compensation  a  part  of  the  retail 
price  which  was  generally  fixed  by  the  manufacturer.  To  some  extent 
this  was  true  of  various  branches  of  the  implement  trade,  but  it  was 
an  especially  prominent  feature  in  the  case  of  harvesting  machines. 
This  system  of  selling  on  a  commission  contract  was  due  to  the  high 
prices  of  harvesting  machines  for  which  neither  the  farmers  nor  the 
dealers  were  generally  able  to  pay  in  cash.  For  this  reason  the  manu- 
facturer in  settlement  with  the  dealer  agreed  to  accept  farmers'  notes, 
generally  drawm  to  cover  payments  in  two  or  three  annual  install- 
ments. In  this  manner  the  farmer  was  enabled  to  pay  for  a  machine 
from  the  proceeds  of  the  crops  harvested  with  it.  While  tliis  placed 
a  financial  burden  on  the  manufacturer  by  increasing  the  capital  he 
required,  it  also  became  a  source  of  additional  profit,  since  credit  or 
long-time  sales  to  farmers  were  at  higher  prices  and  the  notes  often 
bore  interest  both  before  and  after  maturity,  and  frequently  at  a 
high  rate.  Dealers  of  greater  financial  strength  sometimes  paid  cash 
or  settled  for  the  machines  with  their  own  notes. 

The  collection  of  great  numbers  of  such  notes  required  a  special 
organization  and  large  expense;  the  discounting  of  such  notes  appar- 
ently was  not  widely  practiced.  The  harvester  trade,  therefore,  early 
required  the  investment  of  considerable  capital  in  the  form  of  notes 
and  accounts  receivable. 

The  use  of  a  large  amount  of  capital  was  also  necessary  by  reason 
of  other  expenses  peculiar  to  this  branch  of  the  implemeat  industry. 


MARKETS  AND  TRADING  359 

To  work  in  connection  with  the  local  dealers  a  great  many  salesmen 
or  "canvassers"  were  introduced.  The  canvasser  was  the  local 
representative  of  a  particular  manufacturer,  and  not,  like  the  local 
dealer  interested  in  the  sale  of  goods  of  various  makers;  consequently 
he  was  a  more  persistent  force  in  pushing  the  sales  of  his  particular 
line  among  farmers.  Another  expense  was  that  for  the  services  of  the 
so-called  "expert."  Since  machines  were  shipped  to  dealers  in  parts, 
or  in  a  "knocked  down"  condition,  the  several  parts  had  to  be 
assembled  properly.  Mechanical  diflficulties  in  setting  up  and  operat- 
ing the  machines  were  adjusted  by  the  expert.  This  was  an  expense 
that  manufacturers  of  most  other  kinds  of  farm  machinery  did  not 
have  to  meet. 

These  special  characteristics  of  the  trade  gave  rise  to  some  differ- 
ences in  the  relations  between  dealers  and  manufacturers  of  harvest- 
ing machinery,  as  distinguished  from  those  existing  between  dealers 
and  manufacturers  of  other  lines,  such  as  plows,  tillage  implements, 
farm  wagons,  etc.  In  the  first  place,  the  dealer's  contract  for  harvest- 
ing machinery  was  a  commission  or  consignment  contract;  the  con- 
tract with  other  manufacturers  was  more  frequently  a  contract  of 
purchase  under  which  the  dealer  bought  his  goods  and  paid  for  them. 
Then,  too,  manufacturers  of  other  lines  than  harvesting  machines 
did  not  usually  employ  canvassers;  consequently  they  did  not  come  so 
closely  in  touch  with  the  farmer,  nor  did  they  have  so  intimate  a 
knowledge  of  the  business  of  individual  dealers.  Furthermore,  they 
generally  sold  to  the  dealer  for  cash  or  on  relatively  short  terms,  while 
harvesting-machine  manufacturers  gave  long  credits. 

97.    THE  DISTRIBUTING  SYSTEM  OF  THE  INTERNATIONAL 

HARVESTER  COMPANY' 

The  distributing  system  of  the  International  Harvester  Co.  is 
centered  in  the  International  Harvester  Co.  of  America,  which  buys 
the  machines  and  other  products  of  the  International  Harvester  Co. 
and  also  some  outside  goods.  The  America  company  sells  principally 
to  dealers  who  in  turn  sell  to  farmers. 

The  sales  organization  of  the  America  company  is  under  the  super- 
vision of  a  general  sales  manager  at  Chicago.  Under  him  are  a 
domestic  sales  manager  in  charge  of  selling  operations  in  the  United 
States  and  Canada,  and  a  foreign  sales  manager  in  charge  of  selling 
operations  in  other  parts  of  the  world. 

'  Adapted  from  the  Report  of  the  United  Stales  Commissioner  of  Corporatiom 
on  the  International  Harvester  Co.  (191s),  PP-  295-96,  31. 


36o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  United  States  is  divided  by  the  company  into  five  sales  dis- 
tricts called,  respectively,  the  Eastern,  Southern,  Central,  North- 
western, and  Southwestern  districts,  each  of  which  is  in  immediate 
charge  of  a  district  sales  manager  with  headquarters  at  Chicago. 
Each  sales  district  is  divided  into  general  agencies,  of  which  there  are 
about  90  in  the  United  States.  In  charge  of  each  general  agency  is  a 
general  agent,  who  directs  the  traveling  men  and  oflBce  employees  of  the 
general  agency,  approves  contracts  made  with  the  local  dealers,  and 
has  general  supervision  of  the  company's  business  in  the  group  of 
counties  assigned  to  his  general  agency.  His  territory  is  divided 
into  "blocks"  of  one  or  more  counties. 

In  each  "block"  a  traveling  man,  known  as  a  blockman,  has 
immediate  supervision  over  the  trade  with  dealers.  Through  him  the 
dealer  comes  in  personal  contact  with  the  company  in  making  his 
contract  of  agency  and  in  ordering  goods  from  the  company.  The 
blockman  keeps  constantly  in  touch  with  the  needs,  financial  con- 
dition, etc.,  of  dealers,  and  the  extent  to  which  competing  goods  are 
handled  in  his  territory. 

The  company  employs  about  700  blockmen.  While  the  travelers 
for  most  other  concerns  ordinarily  get  around  to  a  particular  town  only 
once  or  twice  a  year,  blockmen  of  the  International  Harvester  Co. 
as  a  rule  return  to  each  dealer  several  times  during  a  season.  To 
accomplish  this  each  blockman  is  given  a  comparatively  small  terri- 
tory to  cover. 

Canvassers  are  also  employed  by  the  company  to  assist  the  block- 
men  and  to  aid  the  dealer  in  soliciting  orders  for  International  Harves- 
ter Co.  machines  and  other  products  among  the  neighboring  farmers. 
A  large  proportion  of  the  farmers  in  the  United  States  are  visited 
several  times  a  year  by  one  or  more  of  these  canvassers,  who  report 
the  farmer's  prospective  needs  to  the  company.  The  company  also 
employs  experts  (though  not  so  many  as  formerly)  to  aid  in  setting 
up  and  starting  machines  and  to  adjust  difficulties  that  may  develop 
in  their  use.  A  separate  force  is  employed  for  the  collection  of 
accounts,  and  branch  offices  or  agencies  for  collection  are  established 
at  various  points  in  the  United  States. 

(The  report  continues  with  a  discussion  of  what  it  calls  the  objectionable 
competiti\e  methods  of  the  International  Harvester  Co.,  listing  the  foUow- 
mg  as  the  chief  of  tiiese  methods.]  • 

(i)  Maintenance  of  bogus  independent  companies  in  the  early 
years  of  the  company's  operr^on. 


MARKETS  AND  TRADING  361 

(2)  Attempts  to  force  dealers  carrying  its  harvesting  machines 
Into  carrying  additional  lines  or  certain  International  lines  exclu- 
sively. At  an  earlier  date  the  contracts  of  the  Harvester  company 
contained  an  exclusive  clause  for  harvesting  machines. 

(3)  Efforts  to  secure  an  undue  proportion  of  desirable  dealers  in 
a  given  town  by  giving  only  one  of  its  several  brands  of  harvesting 
machines  to  a  dealer,  thus  tending  to  restrict  the  outlet  for  competi- 
tive goods. 

(4)  Use  of  "suggested  price"  lists,  tending  to  influence  the  final 
retail  price;  earlier  the  contracts  themselves  provided  for  fixing  of 
retail  prices  by  the  company. 

(5)  Occasional  discrimination  in  prices  and  terms. 

(6)  Misrepresentations  by  salesmen  regarding  competitors. 

98.    CO-OPERATIVE  FRUIT  MARKETING' 

The  California  orange  and  lemon  crop  equals  50,000  carloads, 
or  about  20,000,000  boxes.  There  are  between  10,000  and  12,000 
growers  engaged  in  the  culture  of  the  fruit.  Four-fifths  of  the  growers 
are  organized  into  co-operative  associations,  more  than  60  per  cent 
of  which  are  federated  into  the  California  Fruit  Growers'  Exchange. 

The  California  Fruit  Growers'  Exchange  is  an  organization  which 
acts  as  a  clearing  house  in  providing  the  facilities  through  which  6,500 
growers  distribute  and  market  their  fruit.  There  are  three  founda- 
tion stones  in  the  exchange  systems — the  local  associations  of  growers, 
the  district  exchanges,  and  the  central  exchange.  The  local  associa- 
tions, the  district  exchanges,  and  the  central  or  California  Fruit 
Growers'  Exchange  are  organized  and  managed  by  the  growers  on  a 
nonprofit  co-operative  basis,  each  of  them  operating  at  cost,  and  each 
distributing  the  entire  net  proceeds  to  the  growers  after  operating 
expenses  are  deducted. 

The  Local  Exchange. — The  California  Fruit  Growers'  Exchange 
comprises  115  local  associations,  each  of  which  has  from  40  to  200 
members.  The  growers  usually  organize  as  a  corporation  without 
profit,  under  the  laws  of  California,  issuing  stock  to  each  member  in 
proportion  to  his  bearing  acreage,  to  the  number  of  boxes  he  ships, 
or  in  equal  amounts  to  each  grower.  The  association  assembles  the 
fruit  in  a  packing  house,  and  there  grades,  pools,  packs,  and  prepares 
it  for  shipment.    The  associations  are  managed  by  a  board  of  directors 

•  From  U.S.  Department  of  Agriculture,  Report  No.  98,  Systems  of  Marketing 
Farm  Products  and  Demand  for  Such  Products  at  Trade  Centers  (1913),  pp.  169-71 


362  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

through  a  manager  and  are  conducted  exclusively  for  the  benefit  of 
the  growers.  They  declare  no  dividends  and  accumulate  no  profits. 
The  fruit  is  pooled  each  month,  or  in  a  shorter  or  longer  period,  each 
grower  receiving  his  proportion  of  the  proceeds  received  for  each 
grade  shipped  during  the  pool.  Many  of  the  associations  pick  the 
fruit,  and  some  of  them  prune  and  fumigate  the  trees  for  the  members. 
Each  association  has  brands  for  each  grade,  and  when  a  carload  is 
ready  for  shipment  it  is  marketed  through  the  district  exchange,  of 
which  the  association  is  a  member,  through  the  agents  and  facilities 
provided  by  the  California  Fruit  Growers'  Exchange. 

The  District  Exchange. — There  are  17  district  exchanges.  These 
exchanges  are  corporations  without  profit.  There  may  be  one  or 
more  district  exchanges  in  a  community,  depending  upon  the  number 
of  local  associations  and  other  local  conditions.  The  district  exchange 
acts  as  a  clearing  house  in  marketing  the  fruit  for  the  associations 
through  the  California  Fruit  Growers'  Exchange  and  acts  as  a  medium 
through  which  most  of  the  business  relations  between  the  exchange 
and  the  local  associations  are  handled.  The  district  exchange  orders 
cars  and  sees  that  they  are  placed  by  the  railroad  at  the  various  asso- 
ciation packing  houses;  keeps  a  record  of  the  cars  shipped  by  each 
association,  with  their  destinations;  informs  itself,  through  the  Cali- 
fornia Fruit  Growers'  Exchange,  of  all  phases  of  the  citrus  marketing 
business;  places  the  information  before  the  associations;  receives 
the  returns  for  the  fruit  through  the  central  exchange  and  returns  the 
proceeds  to  the  associations. 

The  Central  Exchange. — The  California  Fruit  Growers'  Exchange 
is  a  nonprofit  corporation  under  the  laws  of  California.  It  is  formed 
by  17  district  exchanges,  with  a  paid-in  capital  stock  of  $17,000. 
It  is  managed  by  a  board  of  17  directors  through  a  general  manager, 
one  director  representing  each  district  exchange.  The  function  of 
the  California  Fruit  Growers'  Exchange  is  to  furnish  marketing 
facilities  for  the  district  exchanges  at  a  pro  rata  share  of  the  cost. 
The  exchange  places  bonded  agents  in  the  principal  markets  of  the 
United  States  and  Canada,  defines  the  duties  of  the  agents,  and 
exercises  supervision  over  them.  It  gathers  information  through 
them  of  conditions  in  each  market,  receives  telegraphic  advices  of 
the  sale  of  each  car  and  furnishes  the  information  every  day  in  bulletin 
form  to  the  local  associations.  The  exchange  business  is  on  a  cash 
basis;  it  makes  prompt  accounting  of  returns  to  the  growers  through 
the  district  exchanges;  it  takes  care  of  litigation  that  arises  in  con- 
nection with  the  marketing  of  the  fruit;  handles  all  claims;  conducts 


MARKETS  AND  TRADING  363 

an  extensive  advertising  campaign  to  increase  the  demand  for  citrus 
fruit;  develops  new  markets,  and  performs  such  other  functions  as 
are  set  forth  in  the  contract  between  the  central  exchange  and  the 
district  exchanges.  The  central  exchange  levies  an  assessment 
against  each  district  exchange  for  a  pro  rata  share  of  the  expense  on 
the  basis  of  the  number  of  boxes  shipped.  It  declares  no  dividends. 
It  does  not  buy  or  sell  fruit  or  any  other  commodity,  and  exercises 
no  control  either  directly  or  indirectly  over  sale  or  purchase.  Its 
function  is  to  provide  facilities  for  the  distribution  and  marketing 
of  the  fruit  for  those  shippers  who  desire  such  facilities.  Under  the 
exchange  system  every  shipper  reserves  the  right  to  regulate  and 
control  his  own  shipments;  to  develop  his  own  brands  of  fruit;  to 
use  his  own  judgment  as  to  when  and  in  what  amount  it  shall  be 
shipped,  to  what  markets  it  shall  be  shipped,  and  the  price  he  is  willing 
to  receive,  reserving  the  right  of  free  competition  with  all  other 
shippers,  including  the  members  of  the  same  organization,  uncon- 
trolled by  any  one.  The  agent  in  the  market  acts  directly  under 
the  order  of  the  shipper,  who  determines  the  prices  at  which  each 
car  shall  be  sold  outside  of  the  auction  markets,  and  all  other  matters 
connected  with  its  distribution,  the  California  Fruit  Growers' 
Exchange  acting  as  the  medium  through  which  orders  pass  from  the 
agent  to  the  shipper,  but  never  selling  a  car  or  determining  the  price 
at  which  the  fruit  shall  be  sold. 

The  exchange  is  a  democratic  organization;  the  growers  exercise 
control  over  all  matters.  Membership  in  the  exchange  is  voluntary; 
a  grower  may  withdraw  from  an  association  at  the  end  of  a  year; 
an  association  may  withdraw  from  a  district  exchange,  and  a  district 
exchange  may  withdraw  from  the  central  exchange;  these  relations 
being  set  forth  in  the  various  contracts  that  hold  the  members 
together.  There  is  no  attempt  on  the  part  of  the  central  exchange 
to  regulate  shipments,  to  eliminate  competition,  divide  the  territory 
or  business  or  to  influence  prices.  In  this  connection  its  functions 
are  to  keep  the  associations  informed  daily  regarding  the  shipments 
from  the  state;  the  general  movement  of  exchange  cars,  the  general 
conditions  of  the  different  marketing  points;  the  prices  at  which  the 
exchange  fruit  is  sold;  and  in  furnishing  such  other  information  as 
will  allow  the  growers  and  shippers  through  their  association  and 
district  exchanges  to  decide  the  questions  of  distribution  and  market- 
ing for  themselves. 

One-third  of  the  entire  shipments  are  sold  at  public  auction,  the 
remainder  through  unrestricted  private  competition.    There  is  no 


364  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

uniformity  in  price  in  the  different  brands,  because  the  fruit  in  each 
section,  on  account  of  soil  and  other  local  differences,  has  an  indi- 
viduality of  its  own,  and  every  brand  sells  on  its  own  merits. 

The  exchange  is  organized  into  several  divisions:  sales,  legal, 
traffic,  advertising,  insurance,  and  mutual  protection,  and  a  supply 
department  which  furnishes  the  materials  used  in  the  packing  houses 
and  on  the  ranches  at  cost  to  the  members.  The  exchange  does  not 
consign  fruit.  It  is  shipped  on  order;  soldf.o.b.;  or  sold  " delivered, 
subject  to  usual  terms."  The  exchange  maintains  district  managers 
in  all  of  the  important  cities  of  the  United  States  and  Canada.  These 
employees  are  exclusively  salaried  agents  engaged  only  in  the  sale 
of  fruit,  in  the  development  of  markets,  and  in  handling  the  local 
business  problems  of  the  exchange. 

99.    ORGANIZED  EXCHANGES:    GRADING  OF  COMMODITIES 

VARIATION   IN   THE    QUALITY   OF  COTTON' 

The  cotton  crop  comprises  a  very  wide  range  of  quality.  This  is 
largely  due  to  the  peculiar  nature  of  the  plant,  which,  instead  of 
maturing  its  product  at  practically  one  time,  produces  over  a  long 
period.  Thus,  of  the  cotton  bolls  of  a  single  stalk,  some  may  open, 
say,  late  in  August  or  early  in  September,  whereas  others  may  not 
ripen  for  many  weeks,  or  even  several  months,  this  depending  largely 
upon  the  weather.  Moreover,  the  gathering  of  the  crop  extends  over 
a  still  longer  period.  In  fact,  the  harvesting  of  the  crop,  which 
begins  about  August,  is  seldom  really  completed  before  February  of 
the  following  year,  although,  of  course,  the  great  bulk  of  the  crop  is 
gathered  long  before  this. 

These  factors  have  a  very  important  bearing  upon  the  quality  of 
the  crop.  That  portion  of  the  crop  which  ripens  first  is  ordinarily 
of  a  brighter  color  and  much  more  free  from  dirt  than  that  gathered 
toward  the  end  of  the  season,  when,  owing  to  continued  exposure  to 
changes  in  the  weather,  such  as  frosts  and  storms,  the  cotton  becomes 
more  and  more  discolored  and  damaged.  The  grade  of  cotton  is  also 
affected  by  the  method  of  gathering.  Carelessness  in  picking,  which 
results  in  getting  an  undue  amount  of  stem  and  leaf  into  the  staple, 
materially  lowers  the  grade. 

The  grade  of  cotton,  as  recognized  by  cotton  exchanges,  is,  in  the 
main,  determined  by  the  degree  of  color  and  the  amount  of  foreign 

■  Adapted  from  the  Report  of  tkt  Untied  States  Commissioner  of  Corporations 
on  Cotton  Exchanges,  Part  I  (1908),  pp.  62—73. 


•    MARKETS  AND  TRADING  365 

matter,  such  as  leaf  and  dirt,  which  it  contains.  The  length  of  the 
staple,  although  an  extremely  important  matter  in  determining  the 
spinning  value  of  cotton,  is  a  distinct  consideration,  which  is  not 
regularly  taken  account  of  in  official  classifications.  The  strength 
of  staple  is  also  largely  disregarded  in  official  classifications.  There  is, 
of  course,  a  general  relationship  between  grade  and  spinning  value. 

COTTON   REQUIRED   BY   MANUFACTURERS' 

Each  manufacturer  requires  a  certain  grade  and  type  of  cotton  to 
produce  his  particular  class  of  goods.  When  a  manufacturer  makes 
a  small  range  in  numbers  of  yarn,  or  is  confined  to  one  or  two  du- 
ferent  grades  of  fabrics,  only  one  grade  of  cotton  will  be  needed. 
When,  however,  a  manufacturer  makes  a  wide  range  of  yarns  and 
fabrics,  different  grades  of  cotton  are  frequently  used.  In  the  first 
case  it  will  be  necessary  for  the  manufacturer  to  have  as  nearly  as 
possible  even-running  bales.  A  mixture  of  cotton — that  is,  to  mix 
the  longer  with  the  shorter  staple — would  cause  considerable  trouble. 
Any  mixing  of  long  and  short  staple  would  mean  a  loss  of  production 
with  an  additional  amount  of  waste  in  the  making  of  yarns.  This 
occurs  in  mills  where  the  mixing  of  cotton  does  not  receive  the  par- 
ticular attention  which  should  be  given  it.  Inability  to  mix  and 
successfully  spin  cotton  of  different  grades  and  lengths  is  due  to  the 
fact  that  the  rolls  in  the  different  machines  which  have  to  draw  out 
the  cotton  into  thread  travel  at  different  speeds,  the  back  roll  traveling 
slower  than  the  front  roll.  These  rolls  are  also  set  a  certain  distance 
apart,  according  to  the  length  of  the  staple.  If  the  rolls  should 
be  set  to  spin  i-inch  cotton  and  i|-inch  should  be  used,  the  rolls 
would  break  the  fibers,  and  this  would  have  a  bad  effect  in  the  making 
of  yarn.  On  the  other  hand,  if  the  rolls  should  be  set  for  ij-inch 
and  seven-eighth  or  i-inch  cotton  should  be  used,  many  fibers  would 
drop  between  the  rolls  and  in  this  way  there  would  be  much  waste 
and  loss.  Where  the  manufacturer  makes  a  wide  range  of  yarns  and 
fabrics,  such  a  mixing  of  cottons  of  extreme  different  lengths  is 
almost  unheard  of.  Therefore,  should  the  manufacturer  get  different 
grades  in  any  lot  of  cotton,  the  bales  would  be  separated  according 
to  grade,  and  used  according  to  the  staple  required  for  a  certain 
yam  or  fabric. 

'  From  John  M.  Carson,  Packing  and  Marketing  of  Cotton,  United  States 
Department  of  Commerce  and  Labor,  Bureau  of  Manufacture,  Special  Agents- 
Series,  No.  58,  1912,  p.  39. 


366  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

THE   BASIS  CONTRACT 

A  vitally  important  characteristic  of  future  contracts  in  cotton 
is  that  they  are  "basis"  contracts;  that  is,  they  do  not  call  for  the 
delivery  of  a  specific  grade  of  cotton,  but  allow  the  seller  the  option 
of  delivering  any  grade  or  a  number  of  grades  within  certain  wide 
limits.  The  buyer  has  no  option  in  this  respect.  He  must  receive 
any  deUverable  grade  or  grades  tendered  by  the  seller.  "Middling" 
cotton  is  always  the  basis  grade  and  can  be  deUvered  on  contract 
at  exactly  the  contract  price.  Other  grades  are  delivered  at  prices 
relative  to  middling — or,  to  use  the  trade  expression,  at  certain 
"differences"  in  price  "on"  (i.e.,  over)  or  "off"  (i.e.,  under)  middling. 
Thus,  if  an  operator  sells  a  future  contract  on  an  exchange  at  lo  cents, 
he  can  deliver  middling  cotton  thereon  at  exactly  the  contract  price; 
or,  if  he  prefers,  he  can  deliver  a  higher  grade  of  cotton,  like  "good 
middling,"  m  which  case  the  buyer  must  pay,  in  addition  to  the  basis 
price  of  lo  cents,  a  difference  of,  say,  one-haK  cent  "on"  that  price, 
making  lo^  cents.  On  the  other  hand,  if  the  seller  prefers  to  deliver 
a  lower  grade,  like,  say,  "low  middling,"  the  buyer  must  take  it,  but  is 
allowed  a  deduction  or  difference  "off"  the  contract  price,  and  pays, 
say,  9^  cents.  In  the  same  way  the  seller  may  deliver  both  high  gradei 
and  low  grades  on  a  single  contract. 

Broadly  speaking,  cotton  delivered  on  contract  consists  of  the 
surplus  grades  or  remnants  of  the  more  desirable  grades.  Even- 
running  cotton — that  is,  cotton  of  substantially  one  grade — can 
ordinarily  be  sold  to  spinners  at  a  premium  above  the  price  of  a  mixed 
assortment  of  grades;  consequently,  buyers  will  not  pay  as  much  for  a 
mixed  assortment  of  cotton  as  for  even-running  cotton.  The  spot 
merchant  therefore  endeavors  to  class  out  his  cotton  into  even-running 
lots  and  to  dispose  of  it  in  the  spot  market  instead  of  tendering  it  on 
contract,  using  the  contract  market  to  get  rid  of  surplus  grades  or 
broken  lots,  known  in  the  trade  as  "overs."  For  these  reasons  a 
mixed  assortment  of  grades  is  often  delivered  on  a  single  contract.' 

Prior  to  the  enactment  of  the  United  States  Cotton  Futures  Act, 
which  went  into  operation  February  i8,  19 15,  the  form  of  contract 
used  by  the  New  York  Cotton  Exchange  had  been  faulty  in  two  par- 
ticulars: it  permitted  delivery  of  cotton  that  the  buyer  could  not 
use — which,  though  "merchantable"  was  not  available  for  mill 
requirements;   and,  secondly,  it  sanctioned  a  method  for  arriving  at 

'  From  the  Report  of  the  United  Stales  Commissioner  of  Corporations  on  Cotton 
Exchanges,  Part  I  (1908),  pp.  2.  3. 


MARKETS  AND  TRADING 


367 


the  diflferences  in  the  value  of  the  various  grades  which  was  arbitrary, 
uncommercial,  and  palpably  unfair.  The  combination  of  these  two 
features  of  the  contract  made  operations  on  the  New  York  Exchange 
objectionable  and  very  properly  called  forth  a  widespread  demand  for 
reform.  Inasmuch  as  the  buyer  of  a  contract  must  accept  whatever 
cotton  the  seller  chooses  to  deliver  to  him  it  is  evident  why  spinners 
found  it  undesirable  and  hazardous  to  buy  cotton  on  the  exchange; 
they  did  not  want  to  place  themselves  in  a  position  where  they  would 
be  obliged  to  accept  cotton  of  various  grades,  including  exceptionally 
low  ones,  many  of  which  they  could  not  possibly  utilize  in  the  manu- 
facture of  cotton  goods.  Moreover,  under  the  old  system,  the  seller 
in  giving  notice  of  delivery,  did  not  inform  the  buyer  of  the  grades  of 
cotton  he  expected  to  deliver. 

The  United  States  Cotton  Futures  act  has  done  away  with  the 
abuses  that  had  previously  existed  by  compelling,  first,  the  adoption 
of  a  uniform  set  of  standard  grades,  secondly,  the  exclusion  from 
deliveries  of  cotton  of  inferior  quality  and  of  very  short  staple,  and 
thirdly,  the  adjustment  of  differences  in  value  of  the  various  grades 
in  a  commercial  way  by  requiring  that  the  figures  be  based  on  prices 
actually  paid  for  the  different  grades  at  the  several  cotton  markets  of 
the  coimtry.' 

RULES  GOVERNING  INSPECTION  OF  CORN  IN  ILLINOIS' 

The  following  maximum  limits  shall  govern  all  inspection  and  grading  of  corn: 


Grade 
Classification 


White,  Yellow,  and 
Mixed  Corn 


Maxiuum  Percentages  of 


Moisture 


Damaged  Corn 


Foreign  Material, 

Including  Dirt, 

Cob,  Other  Grains, 

Finely  Broken 

Corn,  Etc. 


"Cracked"  Com, 
Not  Including  Finely 

Broken  Com 
(See  General  Rule  9) 


No.  1 

No.  3 

No.  3 

No.  4 

No.  s 

No.  6 

"Sample". 


14 
IS 

17 
19 
21 

23 


2* 

4* 

6* 

8t 

lot 

IS§ 


See  General  Rule  No.  6  for  Sample  Grade 


a 
3 

4 
4 
S 
7 


*  Exclusive  of  heat  damaged  or  maho  any  kernels. 

t  May  include  heat  damage  '  or  mahogany  kernels  not  to  exceed  J  per  cent. 
X  May  include  heat  damaged  or  mahogany  kernels  not  to  exceed  i  per  cent. 
§  May  include  heat  damaged  or  mahogany  kernels  not  to  exceed  3  per  cent. 

•Adapted  from  I.  Newton  Hoffmann,  "The  Cotton  Futures  Act,"  Journcu 
of  Political  Economy,  XXIII,  469-70,  481. 

*From  the  annual  report  of  the  Board  of  Trade,  Chicago,  1914,  pp.  30-51. 


368  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

CEMERAL   Rin.ES 

I.  Com  in  Grades  No.  i  to  No.  s.  inclusive,  must  be  sweet. 
J.  White  corn,  all  grades,  shall  be  at  least  g8  per  cent  white. 

3.  Yellow  corn,  all  grades,  shall  be  at  least  95  per  cent  yellow. 

4.  Mixed  corn,  all  grades,  shall  include  corn  of  various  colors  not  coming  within  the  limits  for 
color  as  provided  for  under  white  or  yellow  com. 

5.  In  addition  to  the  various  limits  indicated,  No.  6  corn  may  be  musty,  sour,  and  may  also 
include  com  of  inferior  quality,  such  as  immature  and  badly  blistered. 

6.  All  corn  that  does  not  meet  the  requirements  of  either  of  the  six  numerical  grades  by  reason 
of  an  excessive  percentage  of  moisture,  damaged  kernels,  foreign  matter  or  "cracked"  com;  or  corn 
that  is  hot,  heat  damaged,  fire  burnt,  infested  with  live  weevil,  or  otherwise  of  distinctly  low  quality, 
shall  be  classed  as  sample  grade. 

7.  In  No.  6  and  sample  grade,  reasons  for  so  grading  shall  be  stated  on  the  inspector's  certificate, 

8.  Finely  broken  corn  shall  include  all  broken  particles  of  corn  that  will  pass  through  a  per- 
forated metal  sieve  with  round  holes  nine  sixty-fourths  of  an  inch  in  diameter. 

9.  "Cracked"  com  shall  include  all  coarsely  broken  pieces  of  kernels  that  will  pass  through 
perforated  metal  sieve  with  round  holes  one-quarter  of  an  inch  in  diameter,  except  that  the  finely 
broken  corn  as  provided  for  under  Rule  8  shall  not  be  considered  as  "cracked"  corn. 

10.  It  is  understood  that  the  damaged  corn;  the  foreign  material  including  pieces  of  cob,  dirt, 
finely  broken  corn,  other  grains,  etc.,  and  the  coarsely  broken  or  "cracked"  corn,  as  provided  for 
under  the  various  grades,  shall  be  such  as  occur  naturally  in  corn  when  handled  under  good  com- 
mercial conditions. 

II.  Moisture  percentages,  as  provided  for  in  these  grade  specifications,  shall  conform  to  results 
obtained  by  the  standard  method  and  tester  as  described  in  Circular  72,  Bureau  of  Plant  Industry, 
U.S.  Department  of  .Agriculture. 

100.  ORGANIZED  EXCHANGES:  FUTURES,  PUTS,  AND  CALLS' 

A  future  contract  in  cotton  may  be  defined  as  an  agreement  on  the 
part  of  the  seller  to  deliver,  and  of  the  buyer  to  receive,  at  some  future 
date,  a  certain  quantity  of  cotton  (in  the  case  of  the  New  York  and 
New  Orleans  cotton  exchanges  50,000  pounds,  or  approximately  100 
bales),  the  contract  price  being  fixed  at  the  time  the  contract  is  made. 
The  seller,  at  the  time  he  enters  into  the  contract,  may  or  may  not 
have  the  cotton  on  hand;  in  the  latter  case  he  is  "selling  short," 
relying  on  his  ability  to  secure  cotton,  or  another  contract  representing 
cotton,  prior  to  the  maturity  of  the  contract  thus  sold.  A  future 
transaction  differs  from  a  "spot"  transaction  in  that  the  latter  is 
made  from  goods  on  hand,  or  immediately  available,  and  calls  for 
practically  immediate  delivery.  Future  transactions  may  be  made, 
and  indeed  are  constantly  made,  by  private  agreement  outside  of 
exchanges.  The  organized  development  of  such  transactions  by 
means  of  exchanges  may,  however,  properly  be  termed  the  "future 
system." 

Future  contracts  are  often,  though  incorrectly,  spoken  of  as 
synonymous  with  "options."    There  is  a  wide  difference  between  the 

■  Adapted  from  the  Report  of  the  United  States  Commissioner  of  Corporations 
on  Cotton  Exchanges,  Part  I  (1908),  pp.  1-2,  46-47. 

[For  other  aspects  of  dealings  on  the  exchanges  see  Selection  106:  "Organized 
Spectilation  and  Its  Regulation,"  and  Selection  228:  "Hedging  as  an  Insurance 
A«»iast  Risk." — Editors.] 


MARKETS  AND  TRADING  369 

two.  "Options,"  as  the  word  implies,  are  mere  privileges  entitling 
one  party,  for  a  fixed  consideration  which  is  really  nothing  more  than 
a  forfeit,  to  call  upon  the  other  party  for,  or  to  deliver  to  him,  a  certain 
quantity  of  merchandise  at  a  fixed  price.  The  important  distinction 
is  that  these  are  mere  privileges  which  may  or  may  not  be  exercised; 
whereas,  in  the  case  of  a  future  contract,  no  such  choice  is  allowed. 
An  option  which  entitles  the  buyer  to  demand  of  the  seller  the  delivery 
of  a  certain  quantity  of  goods  at  a  fixed  price  is  known  as  a  "call," 
while  one  which  entitles  him  to  deliver  to  the  seller  of  the  option  such 
goods  is  known  as  a  "put."  Sometimes  two  options  are  combined  in 
one,  and  the  transaction  is  then  usually  spoken  of  as  a  "spread"  or 
"straddle. "» 

A  call  may  be  described  more  concretely  as  follows:  An  operator, 
say,  in  the  stock  market,  at  a  time  when  a  certain  stock  is  selling  at 
par  (100),  believes  that  it  is  going  much  higher.  Instead  of  buying 
the  stock  outright  or  on  margin,  he  buys  from  a  person  having  a  con- 
siderable quantity  of  the  stock  the  right  to  call  upon  that  person  for 
a  certain  mmiber  of  shares  within  a  fixed  time,  at  a  certain  price  above 
the  market,  say  at  105.  For  this  privilege  he  pays  the  other  party, 
say,  $2  per  share.  If,  prior  to  the  expiration  of  the  time  limit,  the 
price  has  gone  to  no,  the  buyer  of  the  call  may  demand  the  delivery 
of  the  stipulated  number  of  shares,  which  the  seller  must  deliver  at 
the  stipulated  price  of  105.  The  buyer  then  sells  out  his  stock  at  no 
and  makes  a  profit  of  5  points,  less  the  2  pomts  he  paid  for  his  call 
and  other  expenses,  such  as  commissions.  On  the  other  hand,  if  the 
price  goes  to  95  without  recovery  during  the  time  limit,  the  buyer  of 
the  call  will  not  demand  dehvery,  since  he  would  still  have  to  pay 
the  stipulated  price  of  105,  but  will  allow  his  option  to  lapse,  in  which 
case,  of  course,  he  forfeits  the  price  paid  for  his  privilege. 

A  put  is  just  the  reverse  of  a  call.  For  instance,  an  operator  in  the 
stock  market,  at  a  time  when  a  given  stock  is  selling  at  100,  believes 
that  it  will  go  to,  say,  90.  Instead  of  selling  it  short,  in  which  case 
he  would  have  to  put  up  a  considerable  margin  and  run  the  risk  of 
heavy  loss  in  case  the  market  advanced  instead  of  declined,  such  an 
operator  buys  from  another  operator,  who  is  not  of  the  same  mind,  a 
put;  that  is,  he  buys  the  privilege  or  right  to  deliver  to  this  second 
operator  a  given  number  of  shares  of  this  stock  at,  say,  98  at  any 
time  within  a  certain  agreed  period.  For  this  privilege  he  may  pay 
the  seller  of  the  put,  say,  $2  a  share.     If  the  stock  goes  to  90  within 

'  Such  straddles  should  not  be  confused  with  straddles  on  regular  future 
contracts. 


37©  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  time  limit,  the  buyer  of  the  put  will  buy  the  stipulated  number 
of  shares  in  the  open  market  and  deliver  them  to  the  seller  of  the  put, 
who  must  take  them  at  98;  the  buyer  of  the  put  (who,  it  may  be  noted, 
is  the  deliverer  of  the  actual  stock)  therefore  makes  8  points  on  the 
transaction,  less  2  points  to  cover  the  cost  of  his  put  and  incidental 
expenses  such  as  commissions.  If,  on  the  other  hand,  the  stock 
advances  above  100,  the  buyer  of  the  put  obviously  will  not  exercise 
his  privilege,  but  will  simply  forfeit  the  price  which  he  paid  for 
the  put. 

The  above  description  explains  the  theory  of  these  operations.  In 
actual  practice  the  two  parties  to  these  options  usually  make  a  settle- 
ment without  the  actual  transfer  of  the  stock;  that  is  to  say,  in  the 
case  of  the  call  described,  the  buyer  of  the  call,  instead  of  actually 
demanding  the  stock  from  the  seller  at  105  when  the  market  price 
reaches  no,  simply  receives  from  the  seller  of  the  call  a  payment  of 
$5  a  share,  less  the  cost,  without  any  actual  transfer  or  resale  of  the 
stock.  On  the  other  hand,  if  the  operator  buying  the  call  has  sold 
stock  short  at  no,  relying  on  his  call  to  protect  him,  he  may  actually 
demand  the  stock  and  deliver  it  to  the  party  to  whom  he  has  sold.' 

The  cost  of  such  options  varies,  of  course,  with  the  conditions  of 
the  market  and  the  views  of  the  two  parties  concerned,  but  ordinarily 
the  amount  of  money  required  to  deal  in  options  or  privileges  is 
relatively  small  as  compared  with  that  necessary  to  buy  or  sell  the 
securities  in  question,  even  on  a  margin  basis.  These  privileges, 
therefore,  afford  a  means  for  speculating  with  the  use  of  only  a  very 
small  amount  of  capital.  Furthermore,  it  is  to  be  emphasized  that 
it  is  optional  with  the  buyer  of  such  privilege  whether  he  will  exercise 
it  or  not.  It  is,  therefore,  apparent  that,  whatever  their  legal  status, 
such  privileges  have  much  of  the  character  of  an  ordinary  wager.' 
Further  discussion  of  the  matter  is  unnecessary  here,  since  the  rules 
of  both  the  New  York  Cotton  Exchange  and  the  New  Orleans  Cotton 
Exchange — the  only  exchanges  in  this  country  on  which  organized 
future  business  in  cotton  is  conducted — expressly  forbid  dealings  in 
such  options  or  privileges;  indeed,  exchanges  rather  generally  prohibit 
such  transactions  on  their  floors,  whether  in  stocks  or  in  commodities. 

»  Calls  are  also  used  by  short  sellers,  so  that  in  case  the  market  advances 
unexpectedly  they  can  demand  stock  on  such  calls  and  limit  loss  on  their  short  sales. 

'  It  should  be  noted,  however,  that  even  in  the  case  of  these  privileges  there  ia 
a  right  to  require  or  to  make  delivery  of  the  actual  product,  in  which  respect  they 
differ  widely  from  a  mere  bet. 


IX.    VALUE 

loi.    DEMAND  AND  GENERAL  OVERPRODUCTION* 

Because  the  phenomenon  of  over-supply,  and  consequent  incon- 
venience or  loss  to  the  producer  or  dealer,  may  exist  in  the  case 
of  any  one  commodity  whatever,  many  persons,  including  some 
distinguished  political  economists,  have  thought  that  it  may  exist 
with  regard  to  all  commodities;  that  there  may  be  a  general  over- 
production of  wealth;  a  supply  of  commodities  in  the  aggregate, 
surpassing  the  demand;  and  a  consequent  depressed  condition  of  all 
classes  of  producers. 

When  these  writers  speak  of  the  supply  of  commodities  as  out- 
nmning  the  demand,  it  is  not  clear  which  of  the  two  elements  of 
demand  they  have  in  view — the  desire  to  possess,  or  the  means  of 
purchase;  whether  their 'meaning  is  that  there  are,  in  such  cases, 
more  consumable  products  in  existence  than  the  public  desires  to 
consume,  or  merely  more  than  it  is  able  to  pay  for.  In  this  uncer- 
tainty, it  is  necessary  to  examine  both  suppositions. 

First,  let  us  suppose  that  the  quantity  of  commodities  produced 
Is  not  greater  than  the  community  would  be  glad  to  consume:  Is 
It,  in  that  case,  possible  that  there  should  be  a  deficiency  of  demand 
for  all  commodities  for  want  of  the  means  of  payment  ?  Those  who 
think  so  cannot  have  considered  what  it  is  which  constitutes  the 
means  of  payment  for  commodities.  It  is  simply  commodities. 
Each  person's  means  of  paying  for  the  productions  of  other  people 
consists  of  those  which  he  himself  possesses.  All  sellers  are  inevit- 
ably and  ex  vi  termini  buyers.  Could  we  suddenly  double  the 
productive  powers  of  the  country,  we  should  double  the  supply  of 
commodities  in  every  market;  but  we  should,  by  the  same  stroke, 
double  the  purchasing  power.  Everybody  would  bring  a  double 
demand  as  well  as  supply — everybody  would  be  able  to  buy  twice 
as  much,  because  every  one  would  have  twice  as  much  to  offer  in 
exchange.  It  is  probable,  indeed,  that  there  would  now  be  a  super- 
fluity of  certain  things.     Although  the  community  would  willingly 

'  From  Joha  Stuart  Mill,  Principles  oj  Political  Economy,  Book  III,  chap.  xiv. 
[On  the  subject  of  demand  see  also  the  selections  under  the  head  of  "Wants 
and  the  Means  of  Their  Satisfaction." — Editors.1 

371 


372  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

double  its  aggregate  consumption,  it  may  already  have  as  much  as 
it  desires  of  some  commodities,  and  it  may  prefer  to  do  more  than 
double  its  consumption  of  others,  or  to  exercise  its  increased  purchas- 
ing power  on  some  new  thing.  If  so,  the  supply  will  adapt  itself 
accordingly,  and  the  values  of  things  w^ill  continue  to  conform  to 
their  cost  of  production.  At  any  rate,  it  is  a  sheer  absurdity  that  all 
things  should  fall  in  value,  and  that  all  producers  should,  in  conse- 
quence, be  insufficiently  remunerated.  If  values  remain  the  same, 
what  becomes  of  prices  is  immaterial,  since  the  remuneration  of 
producers  does  not  depend  on  how  much  money,  but  on  how  much 
of  consumable  articles,  they  obtain  for  their  goods.  Besides,  money 
is  a  commodity;  and  if  all  commoditfes  are  supposed  to  be  doubled 
in  quantity,  we  must  suppose  money  to  be  doubled  too,  and  then 
prices  would  no  more  fall  than  values  would. 

A  general  over-supply,  or  excess  of  all  commodities  above  the 
demand,  so  far  as  demand  consists  in  means  of  payment,  is  thus 
shown  to  be  an  impossibility.  But  it  may  perhaps  be  supposed  that 
it  is  not  the  ability  to  purchase,  but  the  desire  to  possess,  that  falls 
short,  and  that  the  general  produce  of  industry  may  be  greater  than 
the  community  desires  to  consume — the  part,  at  least,  of  the  com- 
munity which  has  an  equivalent  to  give.  It  is  evident  enough  that 
produce  makes  a  market  for  produce,  and  that  there  is  wealth  in 
the  country  with  which  to  purchase  all  the  wealth  in  the  country; 
but  those  who  have  the  means  may  not  have  the  wants,  and  those 
who  have  the  wants  may  be  without  the  means.  A  portion,  therefore, 
of  the  commodities  produced  may  be  unable  to  find  a  market  from 
the  absence  of  means  in  those  who  have  the  desire  to  consume,  and 
the  want  of  desire  in  those  who  have  the  means. 

This  is  much  the  most  plausible  form  of  the  doctrine,  and  does 
not,  like  that  which  we  first  examined,  involve  a  contradiction. 
There  may  easily  be  a  greater  quantity  of  any  particular  commodity 
than  is  desired  by  those  who  have  the  ability  to  purchase,  and  it  is 
abstractedly  conceivable  that  this  might  be  the  case  with  all  com- 
modities. The  error  is  in  not  percei\'ing  that  though  all  who  have 
an  equivalent  to  give  might  be  fully  provided  with  every  consumable 
article  which  they  desire,  the  fact  that  they  go  on  adding  to  the 
production  proves  that  this  is  not  actually  the  case.  Assume  the 
most  favorable  hypothesis  for  the  purpose,  that  of  a  limited  com- 
munity, every  member  of  which  possesses  as  much  of  necessaries 
and  of  all  known  luxuries  as  he  desires;   and  since  it  is  not  conceiv- 


VALUE  373 

able  that  persons  whose  wants  were  completely  satisfied  would  labor 
and  economize  to  obtain  what  they  did  not  desire,  suppose  that  a 
foreigner  arrives  and  produces  an  additional  quantity  of  something 
of  which  there  was  already  enough.  Here,  it  will  be  said,  is  over- 
production— true,  I  reply;  over-production  of  that  particular  article; 
the  community  wanted  no  more  of  that,  but  it  wanted  something. 
The  old  inhabitants,  indeed,  wanted  nothing;  but  did  not  the  foreigner 
himself  want  something  ?  When  he  produced  the  superfluous  article, 
was  he  laboring  without  a  motive  ?  He  has  produced,  but  the  wrong 
thing  instea.d  of  the  right.  He  wanted,  perhaps,  food,  and  has  pro- 
duced watches,  with  which  everybody  was  sufficiently  supplied.  The 
new  comer  brought  with  him  into  the  country  a  demand  for  commodi- 
ties, equal  to  all  that  he  could  produce  by  his  industry,  and  it  was  his 
business  to  see  that  the  supply  he  brought  should  be  suitable  to  that 
demand.  If  he  could  not  produce  something  capable  of  exciting  a 
new  want  or  desire  in  the  community,  for  the  satisfaction  of  which 
some  one  would  grow  more  food  and  give  it  to  him  in  exchange,  he 
had  the  alternative  of  growing  food  for  himself;  either  on  fresh  land, 
if  there  was  any  unoccupied,  or  as  a  tenant,  or  partner,  or  servant, 
of  some  former  occupier,  willing  to  be  partially  relieved  from  labor. 
He  has  produced  a  thing  not  wanted  instead  of  what  was  wanted; 
and  he  himself,  perhaps,  is  not  the  kind  of  producer  who  is  wanted; 
but  there  is  no  over-production;  production  is  not  excessive,  but 
merely  ill  assorted.  We  saw  before,  that  whoever  brings  additional 
commodities  to  the  market,  brings  an  additional  power  of  purchase; 
we  now  see  that  he  brings  also  an  additional  desire  to  consume;  since 
if  he  had  not  that  desire,  he  would  not  have  troubled  himself  to  pro- 
duce. Neither  of  the  elements  of  demand,  therefore,  can  be  wanting, 
when  there  is  an  additional  supply;  though  it  is  perfectly  possible 
that  the  demand  may  be  for  one  thing,  and  the  supply  may  unfor- 
tunately consist  of  another. 

I02.    ADVERTISING  AND  DEMAND* 

Advertising  may  be  said  to  build  up  three  general  classes  of 
demand:  (i)  expressed  conscious  demand,  (2)  unexpressed  conscious 
demand,  and  (3)  subconscious  demand. 

'From  A.  W.  Shaw,  "Some  Problems  in  Market  Distribution,"  Quarterly 
Journal  of  Economics,  XXVI,  746  (August,  191 2). 

[For  the  more  general  discussion  of  market  distribution  by  the  same  author 
see  Selection  94. — Editors.] 


374  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  three  classes  may  be  illustrated  by  supposing  a  product  for 
sale  by  grocers  to  be  advertised  in  a  periodical  of  large  circulation  by 
a  double  page  costing  for  one  insertion  $8,000.  If  as  a  result  of  the 
advertisement  30,000  people  go  to  the  grocery  and  buy  the  product, 
60,000  plan  to  purchase  the  product  at  some  future  time  when  such  an 
article  is  needed,  and  100,000  more  become  open  to  a  further  exciting 
force,  such  as  seeing  the  product  at  the  grocery  and  recognizing  it  as 
one  advertised,  then  we  should  call  the  30,000  the  expressed  conscious 
demand,  the  60,000  the  unexpressed  conscious  demand,  and  the 
100,000  the  subconscious  demand  resulting  from  the  advertisement. 
Expressed  conscious  demand  means  present  sales;  unexpressed  con- 
scious demand  means  future  sales;  subconscious  demand  means  that 
the  field  has  been  fertilized  so  that  future  selling  efforts  will  be  more 
fruitful.  Unexpressed  conscious  demand  and  subconscious  demand 
are  difficult  of  measure  but  must  always  be  taken  into  accoimt  in  any 
consideration  of  the  efficiency  of  advertising  as  a  seUing  agency. 

103.     THE  ABILITY  OF  THE  CONSUMER  TO  DEFEND 

HIMSELF' 

The  consumer  is  the  point  of  attack,  either  immediately  or  ulti- 
mately, in  every  advertising  campaign  for  advertising  goods  finally 
sold  at  retail.  And  while  we  are  discussing  methods  of  attack,  is  it 
not  well  to  take  stock  of  the  consumer's  defense?  What  are  the 
characteristics  of  the  consumer  as  a  class  which  meet,  and,  in  a 
measure,  offset  advertising  and  selling  betterments  ?  Space  will  not 
let  us  catalogue  more  than  a  very  few: 

(i)  The  consumer's  spending  power  is  limited  by  his  earning 
ability.  He  may  develop,  or  have  stirred  in  him,  new  wants,  strong 
enough  to  make  him  work  harder  in  order  to  earn  more,  but  he  cannot 
honestly  spend  more  money  than  he  earns,  no  matter  how  complicated 
his  wants  may  become.  This  sets  a  final  limit  on  consuming  capacity, 
and  sets  a  limit  to  the  exercise  of  his  will. 

(2)  The  strength  of  the  consumer's  savings  instinct  determines 
the  margin  between  his  earning  power  and  his  willingness  to  spend. 
The  strength  of  this  instinct  is  only  relative  and  here  the  consumer  is 
vulnerable.     His  "will  to  save"  is  elastic. 

'From  P.  T.  Cherington,  Advertising  as  a  Business  Force,  pp.  92-94,  116. 
Doubleday,  Page  &  Co.,  1913.  (Copyrighted  by  the  Associated  Advertising  Clubs 
of  America.) 


VALUE  375 

(3)  The  "standard  of  living,"  the  opinion  of  the  class  to  which 
the  consumer  belongs  as  to  what  may  be  expected  of  him  in  the 
spending  of  his  income,  has  its  constant  effect  on  a  civilized  man's 
conduct,  and  this  again  is  relative  and  open  to  attack. 

(4)  Price  habits  have  tended  to  become  fixed  in  many  lines  of 
retail  business.  The  consumer  has  come  to  accept  an  increasing 
number  of  set  prices,  and  set  price  intervals.  There  may  be  a  few 
places  in  this  country  where  a  man  expects  to  find  a  necktie  line  regu- 
larly carried  at  some  price  other  than  50  cents  or  $1  or  upward,  but 
they  are  few.  And  so  it  is  with  suspenders,  shirts,  shoes,  socks — al- 
most everything  a  man  wears — certain  price  habits  have  become  well 
established.  This  puts  competition  in  these  lines  on  a  basis  of 
quality,  or  service.  It  makes  purchase  easy  for  the  consumer,  but 
it  modifies  the  character  of  the  advertising  appeal,  as  we  shall  see. 

(5)  Buying  habits  are  undergoing  modification  also.  And  these 
make  another  change  in  the  advertiser's  position.  With  price 
"higgling"  partly  eliminated,  and  the  whole  problem  of  appeal  and 
sale  based  on  quality  and  guaranteed  satisfaction,  the  consumer  has 
come  to  expect  that  goods  can  be  bought  without  bargaining.  The 
consumer  certainly  is  safer  in  his  purchasing,  but  equally  certainly 
he  is  more  careless. 

(6).  And  again  there  is  the  effect  of  the  multiplicity  of  appeals 
being  made  to  the  consumer.  The  individual  consumer  and  the 
consumer  as  a  class  is  appealed  to  from  so  many  sides  that  the  effect 
of  no  single  appeal  can  be  what  it  would  if  it  stood  alone. 

To  sum  up  these  consumer  defenses  we  find  that,  while  the 
consumer,  as  an  individual  or  as  a  class,  may  be  led,  stimulated, 
diverted,  directed  or  otherwise  influenced  in  buying,  there  are  certain 
roughly  ascertainable  limits  to  the  effects  which  may  be  expected 
to  follow  attacks  on  the  will  of  the  consumer.  There  are  certain 
limits  beyond  which  his  earning  power  will  not  let  him  go,  there 
are  others,  less  certain,  beyond  which  he  will  not  buy  unless  his 
saving  impulses  are  stifled,  there  are  social  and  commercial  habit 
barriers  to  consumer  diversion,  and  last  of  all,  the  appeals  to  the 
consumer  may  partly  neutralize  each  other  by  their  mere  multiplicity. 

These  few  points,  out  of  many  which  could  be  considered,  have 
been  presented  in  order  to  help  us  appreciate  how  much  more  than  a 
mere  market  for  goods  is  the  modern  consumer.  As  an  object  of 
advertising  attack  he  is  a  complicated  and  variable  composite  under 
pressure  from  within  and  without.     And  there  is  scarcely  an  emo- 


376  MATERL\LS  FOR  ELEMENTARY  ECONOMICS 

tional  motive,  or  an  economic  impulse  with  any  influence  on  human 
action,  which  can  be  ignored  with  safety  by  the  advertiser  who  wants 
to  catch  and  hold  him. 

Nor  is  the  consumer  inert.  He  has  powers  of  resistance,  and 
he  is  learning  how  to  use  them.  Even  lea\ing  the  supremely  impor- 
tant problems  of  consumer  psychology  out  of  consideration,  he  has 
means  at  hand  for  taking  advantage  of  any  weakness  in  advertising 
plans.  The  consumer  problems  of  the  modern  advertiser  are  not 
merely  to  discover  buyers  of  goods  and  to  exploit  them.  They  are 
as  intricate  as  war  plans. 

104.     SOME  CASES  OF  DEMAND  AND  SUPPLY' 

Reflecting  the  influence  of  a  hot  weather  demand,  the  market 
for  watermelons  at  Chicago  yesterday  displayed  decided  firmness 
and  prices  took  an  upward  jump  of  $15  to  $40  per  car,  selling  up  to 
$300.  Receipts  were  only  11  cars,  which  found  a  ready  outlet  at 
the  upturn. 

More  blackberries  were  on  sale  than  on  any  pre\'ious  day  this 
year  and  prices  took  a  sharp  downward  slump.  Bakers,  canners, 
and  distillers  were  the  principal  buyers  at  $1.40  to  $1.50  per  case. 
Other  berries  held  at  former  prices.  Peaches  were  higher  at  $2.25 
per  bushel.     Receipts  were  7  cars  and  the  demand  was  broad. 


Constantinople  advices  said  of  attar  of  rose:  "We  are  informed 
by  our  people  in  the  interior  that  although  the  crop  of  flowers  has 
been  large  in  consequence  of  the  propitious  weather  conditions, 
higher  prices  than  last  season  have  been  paid  for  them.  Besides 
this  there  are  some  other  reasons  increasing  the  cost  of  attar,  princi- 
pally the  smaller  yield  and  the  increased  wages  and  expenses.  Not- 
withstanding the  bad  yield  after  distillation,  we  estimate  that  there 
will  be  a  little  more  oil  this  year  on  account  of  the  larger  number  of 
roses;  yet  it  is  too  early  to  say  anything  definite  on  the  subject." 

Com  furnished  considerable  excitement  in  the  grain  markets 
yesterday,  advancing  ijc.  to  25c.,  with  active  and  excited  trading. 
The  weather  map  was  responsible  for  the  initial  impulse,  as  it  showed 
higher  temperatures  in  the  southwestern  part  of  the  belt  and  an 
absence  of  rainfall  and  predictions  of  a  continuance  of  these  conditions. 

'  From  daily  newspapers. 


VALUE  377 

It  also  furnished  an  excellent  opportunity  for  the  crop  experts  to 
get  in  their  fine  work,  and  reports  of  damage  were  more  or  less  sen- 
sational all  day.  A  statement  issued  by  B.  W.  Snow  said  that  his 
returns  to  date,  covering  almost  half  of  the  corn-producing  counties, 
were  showing  sensationally  on  corn  prospects.  The  worst  damage 
was  in  Kansas,  showing  a  drop  of  almost  50  points  since  July  i,  with 
the  later  reports  making  it  even  worse.  Nebraska  has  declined  20 
points  and  Oklahoma  40,  and  Missouri  10  points,  with  practically 
every  state  in  the  Middle  West  or  Southwest  showing  a  decline. 
This  would  make  the  general  average  below  80  and  would  carry  the 
total  crop  to  2,700,000,000  bushels,  or  a  loss  of  200,000,000  bushels 
since  the  first  of  July.  This  was  a  fair  sample  of  the  reports  coming 
in,  resulting  in  a  stampede  of  shorts.  Some  crop  experts,  however, 
were  inclined  to  take  the  other  view.  0.  K.  Lyle,  in  a  dispatch  from 
Springfield,  Mo.,  reported  that  state  as  about  normal,  with  some 
betterment  following  the  rains  of  last  week.  Practically  all  the 
offerings  of  corn  were  absorbed  through  the  commission  houses  and 
some  of  the  big  speculators  were  declared  to  have  put  out  new  long 
lines. 

Oats  felt  the  effect  of  the  advance  in  corn  and  there  were  predic- 
tions that  December  would  sell  at  50c.  a  bushel  at  Chicago.  Never- 
theless, the  Iowa  weather  bulletin  reported  that  late  oats  are  turning 
out  better  than  expected.  There  was  considerable  buying  in  sym- 
pathy with  corn,  and  there  were  further  estimates  that  the  crop 
would  be  under  a  billion  bushels.  Prices  were  fc.  to  ic.  higher  at 
the  close. 

Wheat  was  decidedly  in  the  background  as  a  speculative  propo- 
sition, but  closed  about  fc.  higher  owing  to  the  strength  in  the  coarse 
grains.  There  was  considerable  buying,  particularly  in  the  North- 
west, as  a  result  of  the  sensational  news  regarding  corn.  The  open- 
ing was  weaker,  owing  to  the  lower  cables  and  favorable  reports 
relating  to  wheat.  Receipts  were  again  heavy  and  export  demand 
was  lacking.  The  arrivals  at  Chicago  yesterday  were  1,042  cars. 
Bradstreet's  visible  supply  showed  an  increase  of  4,316,000  bushds. 

The  evidence  that  is  coming  to  hand  from  one  quarter  and  another 
tends  to  show  that  the  earlier  reports  of  dulness  in  the  anthracite 
trade,  the  immense  stocks  of  left-over  coal  in  the  hands  of  dealers, 
and  the  reluctance  of  the  retail  trade  to  buy  at  the  spring  discount 
have  been  somewhat  overdrawn.     It  is  true  that  orders  are  coming 


375  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in  slower  than  usual,  but  this  is  less  important  than  might  appear 
at  first  glance  when  it  is  remembered  that  the  producers  are  generally 
heavily  oversold  in  April  and  have  to  carry  over  many  orders  into  May. 

As  a  matter  of  fact,  coal  has  been  coming  to  this  market  in  such 
limited  quantities  since  the  first  of  the  month  that,  instead  of  being 
troubled  with  a  surplus,  most  shippers  are  behind  on  their  orders. 

For  one  thing  the  weather  this  month  has  helped  the  retailers 
in  moving  stock  carried  over  from  winter.  Probably  more  coal  was 
used  for  heating  during  the  first  half  of  April  than  in  the  last  half 
of  March,  or  in  any  two  weeks  of  March  for  that  matter.  Bare 
spots  are  begmning  to  show  in  a  good  many  retail  plants  that  appar- 
ently had  enough  coal  on  hand  at  the  first  of  the  month  to  last  until 
May.  Some  dealers  who  deferred  ordering  because  they  were  not 
quite  ready  to  take  in  the  tonnage,  but  at  the  same  time  would  like 
to  get  some  coal  shipped  at  the  April  discount,  are  now  sending  in 
their  orders.  New  England  buyers  are  reported  to  be  more  backward 
than  those  in  the  vicinity  of  New  York. 

It  is  quite  the  usual  thing  for  a  Uttle  flurry  to  develop  as  the  end 
of  a  spring  or  summer  month  approaches,  and  perhaps  the  shippers 
will  go  into  May  with  more  orders  on  their  books  than  seemed  likely 
a  short  time  ago.  At  any  rate  the  April  output  will  be  taken  care 
of  in  good  shape,  and  little  is  heard  now  of  individuals  shading  the 
circular. 

Conditions  in  the  spot  bituminous  market  seem  to  have  improved 
somewhat  in  the  past  week.  Not  only  is  there  a  slightly  better 
inquiry  from  buyers  who  have  been  slow  in  renewing  contracts  but 
there  appears  to  be  less  cheap  coal  pressing  for  sale  and  being  sacri- 
ficed at  figures  which  mean  a  loss  to  the  shipper.  Occasional  forced 
sales  are  heard  of,  but  they  are  becoming  less  frequent.  It  is  evident 
that  the  trade  as  a  whole  has  made  a  very  good  get-away  on  the  new 
year's  business.  The  number  of  concerns  reporting  satisfactory 
progress  in  the  closing-up  of  contracts  is  increasing  week  by  week 
and  the  business  almost  invariably  carries  an  advance  over  last 
year's  prices.  One  peculiarity  of  the  present  season  is  that  big 
business  is  less  backward  than  small.  One  or  two  railroad  companies 
which  buy  heavily  in  March  for  future  delivery  placed  their  usual 
contracts  last  month  without  making  any  serious  objection  to  the 
higher  prices  which  they  were  called  upon  to  pay. 

While  tariff  agitation   is  no  doubt  causing   manufacturers  of 
protected  articles  a  good  deal  of  worry  and  has  impelled  some  of 


VALUE  379 

them  to  go  slow  in  making  advance  purchases  of  coal  and  other 
supplies,  there  has  been  little  actual  slowing-down  at  the  factories. 
The  output  of  manufactured  goods  in  recent  months  has  only  about 
kept  pace  with  demand  and  there  is  no  heavy  accumulation  of  stocks. 


The  crude  rubber  market  continues  inactive  and  there  is  no  evi- 
dence of  any  great  desire  to  purchase  by  the  manufacturers  here.' 
With  the  close  of  the  active  tire  manufacturing  season  there  seems 
little  chance  that  there  will  be  any  big  demand  for  some  months  to 
come,  and  the  present  price  for  the  Para  grades,  ranging  from  $i .  05  to 
$1.08  per  pound,  is  liable  to  decline  further  rather  than  advance, 
although,  of  course,  the  usual  manipulative  measures  adopted  so  often 
in  the  rubber  market  may  cause  temporary  advances  which  may  range 
all  the  way  from  5  to  15  cents  a  pound. 

But  the  general  impression  is  that  the  time  of  high  prices  for 
rubber  is  past.  That  there  will  ever  again  be  a  period  of  $3  rubber 
is  practically  out  of  the  question.  In  fact,  there  is  no  reason  now  for 
the  belief  that  rubber  above  $1 .  70  is  more  than  a  possibility,  at  least 
for  months  to  come. 

There  are  many  reasons  for  this  belief,  principally,  however,  the 
fact  that  it  is  becoming  easier  every  year  to  compute  in  advance  the 
rubber  output  for  the  year.  This  is  because  Brazil  no  longer  occupies 
the  absolute  center  of  the  rubber-producing  industry  that  was  held 
by  that  country  for  so  long.  Rubber  plantations  started  from  five  to 
ten  years  ago  are  now  producing  at  a  rate  that  makes  them  a  big 
factor,  and  within  a  very  few  years  they  will  be  in  a  position  to  exert 
an  even  greater  influence  over  the  rubber  market.  Of  course,  Brazil 
will  for  many  years  be  the  chief  producer  of  the  highest  grades  of 
Para  rubber,  but  she  can  no  longer  be  said  to  have  the  domineering 
influence  that,  up  until  a  year  ago,  she  exercised. 

Crude  rubber  for  the  past  month,  even  at  the  low  level  as  compared 
with  a  year  ago,  has  been  strong.  Particularly  has  this  been  true 
during  most  of  the  last  week.  During  the  last  two  days,  however, 
weakness  has  again  developed,  and  the  price  may  soon  be  below  the 
$1  mark  again.  Manufacturers  are  buying  on  the  hand-to-mouth 
basis,  it  is  generally  acknowledged,  and  unless  there  is  a  big  increase 
in  the  boot  and  shoe  business  this  policy  will  probably  continue 
throughout  the  winter. 

'  From  the  Wail  Street  Journal,  igii. 


380  MATERL\LS  FOR  ELEMENTARY  ECONOMICS 

According  to  the  London  Economist:  "In  1909  the  world's  con- 
sumption of  rubber  was  about  70,000  tons,  of  which  the  plantations 
provided  at  the  most  4,000  tons;  in  191 2  consumption  had  risen  to 
about  100,000  tons,  of  which  the  plantations  provided  30,000  tons. 
In  three  years'  time  Mr.  Akers  estimates  that  the  plantations  alone 
will  yield  173,000  tons,  and  in  1919  302,000  tons.  If  prices  fall  to 
IS.  a  lb.,  it  is  perhaps  not  unreasonable  to  assume  that  consumption 
«\-ill  continue  to  increase  in  the  existing  uses  of  rubber,  and  rise, 
perhaps,  to  150,000  tons  or  even  200,000  in  a  few  years,  for  as  prices 
fall,  not  only  will  the  consumption  of  rubber  goods  increase,  but  also 
genuine,  good  rubber  will  be  substituted  for  the  poor  and  composite 
materials  which  so  frequently  masquerade  as  'rubber.'  Unless, 
however,  a  very  large  demand  arises  for  new  industrial  purposes 
which  are  not  yet  apparent,  it  will  be  impossible  to  dispose  of  the 
enormous  quantities  mentioned  except  at  very  much  lower  prices 
than  have  ever  yet  been  known  in  the  rubber  market.  In  these 
circumstances  clearly  one  of  two  things  must  happen.  Either  large 
tracts  of  land  that  have  been  planted  must  be  abandoned  to  the 
jungle,  or  else  the  cost  of  working  the  estates  must  fall  to  the  neigh- 
borhood of  6d.  a  lb. — a  cost  which  has  already  been  realized  in  favor- 
able circumstances  in  Ceylon.  This  is,  indeed,  a  choice  of  evils, 
for  both  of  these  eventualities  mean  ruin  or  reconstruction  for  a  good 
proportion  of  the  boom  estates.  Such  is  the  situation  created  by 
the  reckless  expansion  of  three  years  ago,  during  which  some  75 
millions  of  British  capital  were  invested  and  a  million  acres  brought 
under  cultivation  or  prepared  for  planting."' 

105.  DEMAND  AND  SUPPLY  IN  THE  MARKET  FOR  AGRICUL- 
TURAL PRODUCTS^ 

THE  SUPPLY  AND  THE  PRICE  OF  EGGS 

The  egg  market  lends  itself  well  to  the  study  of  many  of  the  forces 
which  influence  prices.  Irregularity  of  the  supply,  variation  in  the 
quality  of  the  product,  and  a  highly  elastic  demand  are  characteris- 
tics strongly  accentuated  in  the  egg  market. 

Irregularity  of  supply. — The  monthly  distribution  of  the  annual 
production  of  eggs  on  a  Wisconsin  dairy  farm  is  shown  in  Fig.  i.     The 

'  From  New  York  Journal  of  Commerce  and  Commercial  Bulletin,  June  4,  1913. 

*  Adapted  from  H.  C.  Taylor,  The  Prices  of  Farm  Products.  Bulletin  No.  209. 
Wisconsin  Agricultural  Experiment  Station,  May,  191 1. 


VALUE 


381 


chart  shows  the  percentage  of  the  year's  egg  production  gathered  in 
each  month  in  the  year  for  five  years.  March  and  April  were  months 
of  greatest  production.  The  production  fell  ofi  greatly  during  the 
summer  months  and  reached  its  lowest  level  during  the  winter  months. 
It  is  believed  that  this  chart  tells  fairly  well  the  story  of  the 
irregularity  of  egg  production  on  farms  where  the  keeping  of  poultry 
is  primarily  for  supplying  the  wants  of  the  household,  and  the  sale  of 
eggs  more  or  less  incidental. 


Fig.  I. — ^The  egg  supply  is  irregular,  varying  with  the  months  as  shown  by 
these  statistics  from  one  Wisconsin  farm.  Each  bar  represents  the  production  for 
one  month  in  terms  of  per  cent  of  the  annual  total  for  each  of  the  five  years,  1905-10. 
This  chart  is  based  upon  data  collected  by  C.  I.  Brigham,  a  co-operator  in  farm 
records  with  the  U.S.  Department  of  Agricultxire  and  this  station. 

It  is  possible  for  the  poultryman  to  control  the  egg  production  in 
such  a  manner  as  to  secure  a  much  larger  proportion  of  the  annual 
product  in  the  winter  months,  but  the  bulk  of  the  egg  supply  is  not 
produced  under  these  conditions.  Taking  the  United  States  as  a 
whole,  there  is  little  concentration  in  the  poultry  industry.  It  appears 
that  the  distribution  is  comparable  with  that  of  white  women  on 
farms.    These  facts  all  show  that  egg  production  is  a  widely  dissemi- 


382 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


nated  non-specialized  industry  and  that  the  supply  is  not  likely  to  be 
appreciably  influenced  by  the  conscious  action  of  a  few  individuals. 

The  Chicago  egg  market. — The  supply  of  eggs  upon  the  Chicago 
market  corresponds  to  these  conditions  of  production.  In  Fig.  2  the 
solid  black  line  represents  the  weekly  supply  of  eggs  brought  to 
Chicago,  from  February  i,  1909,  to  March  20,  191 1.  The  supply  of 
eggs  reached  the  maximum  in  April  and  May  and  gradually  fell  off 
until  the  end  of  the  year. 

The  price  of  eggs  on  the  Chicago  market  shows  the  influence  of  the 
irregular  supply.  The  black  dots  connected  by  lines,  in  Fig.  2,  show 
the  price  of  the  best  grade  of  eggs  for  one  day  in  each  week. 

The  relation  between  the  supply  curve  and  the  price  curve  in  this 
chart  illustrates  the  influence  of  variarion  in  the  supply  upon  the 


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Fig.  2. — Weekly  receipts  and  price  of  eggs  of  the  "prime  first"  class  on  the 
Chicago  market.  February  i,  1909,  to  March  20,  1911.  Note  the  irregularity 
of  the  supply;  the  relation  of  supply  to  price,  a  decrease  in  the  supply  being 
followed  by  an  increase  in  the  price,  and  also  the  wide  difference  in  price  be- 
tween fresh  and  storage  eggs. 

price  of  this  perishable  commodity.  The  fact  that  the  price  of  eggs 
in  Chicago  remained  above  20  cents  during  the  periods  of  greatest 
receipts  in  1909  and  1910  calls  for  some  explanation.  The  elastic 
character  of  the  demand  for  eggs  has  already  been  mentioned.  At  a 
price  between  20  and  25  cents  eggs  become  an  inexpensive  substitute 
for  meat,  and  at  the  time  of  the  year  under  consideration,  weather 
conditions  are  usually  such  that  eggs  can  be  put  upon  the  market  in 
good  condition.  Under  these  circumstances  the  consumption  of  eggs 
expands  enormously. 

The  storage  of  eggs. — The  market  is  not  entirely  dependent,  how- 
ever, at  the  period  of  maximum  supply  upon  the  demand  for  eggs  for 


VALUE 


383 


immediate  consumption.  At  that  period  many  eggs  are  purchased 
and  put  in  storage  for  use  during  the  period  of  scarcity  of  fresh  eggs. 
The  time  of  year  when  eggs  are  put  in  storage  by  one  Chicago  firm  is 
shown  in  Fig.  3.  Without  question  this  speculative  buying  steadies 
the  price  during  the  spring  months  of  excessive  supply,  distributes  the 
consumption  more  evenly  through  the  year,  and  secures  for  the  pro- 
ducers a  higher  return  for  their  eggs  than  could  be  secured  without 
storage. 

The  stored  egg  is  much  less  valuable  in  winter  than  is  the  fresh 
supply.    The  lower  price  curve  shown  for  a  few  winter  months  in  Fig.  2 


Fig.  3. — Quantities  of  eggs  put  into  storage  each  month  by  one  Chicago  firm. 
Note  that  practically  the  entire  stock  is  purchased  during  a  few  weeks  in  the  spring 
when  prices  are  usually  lowest  as  a  resiilt  of  an  abundant  supply. 

shows  the  prices  of  refrigerator  eggs.  It  will  be  noted  that  there  was 
often  a  difference  of  ten  cents  per  dozen  between  the  price  of  fresh 
and  of  stored  eggs.  It  should  also  be  noted  that  the  price  at  which 
the  refrigerator  eggs  were  sold  was  not  very  much  higher  than  the 
price  at  which  they  were  purchased.  There  must,  in  the  long  run, 
be  enough  difference  to  pay  the  actual  costs  of  storage  including  rent 
for  the  warehouse,  losses  due  to  deterioration,  interest  on  the  money 
invested,  insurance,  and  enough  profit  to  induce  a  business  man  to 
give  his  attention  to  this  business  instead  of  doing  something  else. 

The  thing  of  first  importance  both  to  producer  and  to  consumer 
is  an  imderstanding  of  the  proper  methods  of  handling  ^gs — proper 


384  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

methods  on  the  farms,  in  the  country  stores,  in  transit,  in  cold  storage. 
in  the  shop  of  the  city  retailer,  and  in  the  homes  of  the  consumers. 
Success  in  holding  a  part  of  the  eggs  of  the  surplus  season  to  meet 
the  demands  of  the  deficit  season  is  dependent  upon  proper  handling 
at  every  point.  It  is  safe  to  say  that  more  bad  eggs  reach  the  kitchens 
of  America  from  other  causes  than  from  too  great  a  length  of  time  in 
cold  storage.  Furthermore,  many  eggs  that  reach  the  kitchen  in 
good  condition  are  allowed  to  deteriorate  in  a  warm  room  before  the 
cook  finds  occasion  to  make  use  of  them.  There  is  responsibility  all 
along  the  line. 

The  testimony  before  the  senate  committee  relative  to  foods  held 
in  cold  storage  was  to  the  effect  that  eggs  produced  during  hot  weather 
will  not,  even  under  most  favorable  conditions,  remain  fit  for  use  over 
three  months,  and  that  more  often  in  less  than  a  month  they  are 
unfit  for  human  food.  This  is  reason  for  not  storing  eggs  more  than 
temporarily  during  the  hot  months,  but  it  does  not  give  basis  for 
legislation  against  the  storage  of  eggs  in  the  cool  months  of  spring  to 
be  kept  over  until  the  period  of  scarcity. 

The  risk  is  great  in  the  storage  of  eggs,  because  of  the  fact  that 
the  whole  supply  must  be  gotten  rid  of  before  the  increase  in  the 
supply  of  fresh  eggs,  or  they  may  become  almost  a  total  loss.  Note 
in  Fig.  2  how  the  price  of  refrigerator  eggs  fell,  in  February,  below  the 
price  which  had  been  paid  for  them  and  then  quotations  ceased. 
This  speculative  feature  is  accentuated  by  the  fact  that  the  period  of 
greatest  scarcity  is  followed  so  closely  and  so  abruptly  by  the  period 
of  maximum  supply,  and  by  the  uncertainty  of  the  time  of  this  change, 
owing  to  the  influence  of  the  weather. 

Another  aspect  of  the  storage  of  eggs  worthy  of  consideration  is  the 
relatively  long  time  between  the  surplus  period  and  the  period  of 
scarcity.  Vegetables  may  be  stored  late  in  the  fall  for  winter  use, 
but  eggs  must  be  stored  early  in  the  spring  and  kept  through  all  the 
hot  months.  Natural  conditions  determine  the  length  of  this  period 
of  storage.  Any  government  regulation  intended  to  improve  the 
conditions  of  the  storage  of  eggs  should  conform  to  this  fact. 

It  is  obvious  that  a  law  limiting  the  storage  of  eggs  to  three  montns 
ignores  the  condition  of  nature  which  makes  storage  desirable.  If  it 
is  the  purpose  of  Congress  to  put  an  end  to  the  storage  of  eggs  in  the 
season  of  surplus  for  use  in  the  period  of  scarcity,  a  three-month 
limit  will  be  as  effective  as  a  ten-day  limit.  The  normal  length  of 
time  from  the  beginning  of  the  surplus  period  to  the  end  of  the  scarcity 


VALUE  385 

period  should  be  accepted  as  the  maximum  length  of  time  to  store 
eggs.  April  is  the  month  in  which  the  maximum  quantity  of  eggs  is 
put  in  cold  storage  (Fig.  3).  The  stored  eggs  are  drawn  upon  when- 
ever the  supply  of  fresh  eggs  falls  below  the  market  demand.  This 
means  that  even  in  August  and  September,  stored  eggs  are  used,  but 
the  greatest  demand  comes  in  December  and  the  aim  is  to  dispose  of 
the  whole  supply  by  the  end  of  January. 

If,  when  properly  handled,  eggs  deteriorate  so  rapidly  that  those 
stored  in  April  will  be  unwholesome  in  December  and  January,  that 
would  be  adequate  grounds  for  abolishing  the  cold  storage  of  eggs  so 
far  as  it  relates  to  the  equalizing  the  supply  of  the  surplus  and  definite 
periods.  If,  however,  by  proper  methods  of  handling  from  the  farmer 
to  the  consumer  eggs  can  be  successfully  kept  from  April  until  January, 
such  storage  will  result  in  a  great  national  economy.  Obviously  the 
storage  industry  should  not  be  legislated  out  of  existence  if  proper 
knowledge  and  efficient  control  are  all  that  are  needed  in  order  to 
avail  the  people  of  the  United  States  of  this  economy  without  danger 
to  the  health  of  the  consumers. 

Government  regulation,  requiring  that  stored  eggs  be  sold  for 
exactly  what  they  are,  would  be  of  great  benefit  both  to  the  producer  and 
to  the  consumer.  If  every  egg  sold  carried  a  date  stamped  upon  it  by 
the  producer,  this  in  itself  would  enable  the  consumer  to  discrimi- 
nate between  city  stored  eggs  and  those  brought  directly  from 
the  farm.  Furthermore,  much  more  might  be  done  than  has  been 
to  extend  the  limits  of  knowledge  regarding  the  best  methods  of 
preserving  eggs. 

Without  government  regulation  the  winter  egg  producers  of  a 
locality  might  protect  themselves  against  unfair  competition  of  stored 
eggs  (the  selling  of  stored  eggs  as  fresh)  by  stamping  their  eggs  in  such 
a  manner  as  will  enable  the  consumer  to  know  what  he  is  buying. 

THE  SUPPLY  AND  PRICE  OF  POTATOES 

There  are  several  factors  which  make  the  price  of  potatoes  very 
uncertain.  While  the  supply  from  year  to  year  is  rather  irregular  the 
demand  is  inelastic.  The  size  of  the  crop  has  little  influence  upon 
the  quantity  of  potatoes  the  ordinary  family  in  the  city  will  buy.  At 
almost  any  price  that  has  prevailed  the  potato  is  cheaper  than  sub- 
stitutes. The  demand  being  stable,  and  the  potato  having  value  only 
until  the  next  crop  comes  into  general  use,  the  price  shows  wide 
fluctuations. 


386 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


In  Fig.  4  the  areas  of  the  checked  bars  represent  the  annual  pro- 
duction of  potatoes  in  the  United  States  and  the  area  in  black  repre- 
sents the  production  in  Wisconsm.    The  monthly  high  and  low  prices 


>io 


CCNTS  PtlR  epgHCL. 


130 


(20 


•  hGHCST    MOffmLY    PRICE 
LOWEST 


+]    us   POTATO     CROP 
I  WIS.       •• 


THE    MILWAUKEE      F«OTAT0        MARKET  ' 


Fig.  4. — The  areas  of  the  checked  bars  represent  the  annual  production  of 
potatoes  in  the  United  States,  while  the  black  bar  represents  the  production  of 
Wisconsin.  The  curves  show  the  high  and  low  prices  each  month.  At  the  right, 
separate  sets  of  curves  are  given  for  old  and  new  potatoes,  showing  the  higher 
price  of  the  new  stock. 

on  the  Milwaukee  market  are  shown  by  dots  connected  by  lines.    It 
should  be  noted  that  there  is  a  very  wide  range  each  month  between 


VALUE  337 

the  high  price  and  the  low  price.  This  implies  a  very  uncertain  con- 
dition of  the  market.  This  wide  range  of  prices  is  doubtless  due,  in 
part,  to  differences  in  the  quality  of  the  potatoes  arriving  on  the 
market.  This  is  indicated  by  the  fact  that  the  range  is  greatest  at 
the  time  when  old  potatoes  are  yet  on  the  market  and  new  potatoes 
are  arriving.  For  19 10  the  chart  shows  the  high  and  the  low  prices 
for  both  old  and  new  potatoes  for  four  months.  The  indications  are 
that  the  very  high  prices  are  for  early  potatoes  shipped  from  a  warmer 
climate. 

Normally  the  price  is  highest  just  before  the  local  supplies  of  new 
potatoes  arrive  in  abundance  upon  the  market,  falls  to  a  low  level 
just  after  potato  harvest,  and  gradually  rises  during  the  season  when 
most  of  the  supply  comes  from  storage. 

From  1906  to  1908  the  potato  crop  decreased.  There  was  a 
remarkable  response  in  the  price  curve,  and  the  1908  crop  was  all 
sold  at  very  remimerative  prices.  This  was  followed  by  an  increase 
of  about  10  per  cent  in  the  acreage  devoted  to  potatoes  the  next 
year,  and  as  the  production  per  acre  in  1909  was  unusually  high,  the 
crop  was  enormous.  The  result  was  a  continuous  fall  in  prices.  The 
price  was  not  good  at  harvest  time,  but  it  grew  worse  every  month. 
Thousands  of  bushels  of  potatoes  were  never  sold  by  the  farmers. 
The  profit  was  out  of  the  potato  business,  and  yet  the  acreage  planted 
in  1910  was  practically  the  same  as  in  1909.  The  early  crop  was  poor, 
but  the  total  production  was  far  above  the  amount  which  would 
command  a  remimerative  price.  It  may  seem  strange  that  the 
farmers  who  had  lost  money  on  their  1909  potato  crop  should  have 
continued  to  cultivate  so  large  an  acreage.  In  one  potato  region  a 
government  employee  went  about  preaching  the  doctrine,  "Now  is 
the  time  to  plant  potatoes.  Lots  of  people  will  be  scared  out,  the 
crop  will  be  small  and  prices  high."  It  is  probable  that  the  very 
recent  and  unprofitable  experience  in  the  going  out  of  hog  production 
in  order  to  sell  com  only  to  find  hog  prices  rising  and  corn  prices 
falling  had  some  influence  in  keeping  the  potato  growers  of  the  north 
central  states  headed  in  the  direction  they  were  going. 

There  is  some  degree  of  probability  that  the  price  of  some  of  the 
staple  farm  products  will  gradually  rise  with  the  growth  of  population 
and  the  resulting  increase  in  market  demands.  But  it  is  not  probable 
that  the  longtime  average  price  of  potatoes  will  ever  rule  very  high. 
The  production  per  acre  is  large;  this  means  that  rent  is  not  a  large 
item  of  cost  per  bushel.    The  area  physically  suited  to  potato  pro- 


388  MATERIALS. FOR  ELEMENTARY  ECONOMICS 

duction  is  vastly  greater  than  will  ever  be  needed  for  that  purpose  and 
there  are  areas  of  potato  land,  not  valuable  for  other  purposes,  large 
enough  to  produce  the  whole  supply.  Potato  growing  for  local  con- 
sumption is  likely  to  remain  important  throughout  the  northern  states. 
But  the  profitable  growing  of  potatoes  for  the  central  markets  will 
probably  be  limited  to  relatively  small  areas  which  are  good  for 
potatoes,  and  of  relatively  less  value  for  other  purposes. 

FACTORS  INFLUENCING  THE  PRICE  OF  CORN 

The  supply  of  corn  varies  from  year  to  year  on  account  of  changes 
in  the  acreage  planted  and  variations  in  the  climatic  influences  which 
determine  the  yield  per  acre.  In  igoi  the  acreage  was  high,  but  the 
weather  was  so  unfavorable  that  the  production  fell  to  about  two- 
thirds  of  the  normal  crop,  and  the  price  increased  in  inverse  proportion 
to  the  supply.  In  1902  the  crop  reached  a  higher  level  than  in  1900 
(Fig.  5).    The  price  declined,  but  not  to  the  level  of  1900. 

From  1902  until  1907  corn  prices  showed  no  sensational  tendencies. 
The  price  was  always  lowest  after  the  season  of  corn  gathering  and 
highest  during  the  summer  months.  This  seasonal  variation  in  prices 
is  normal.  Corn  weighs  more  just  after  harvest  than  it  does  later, 
and  the  price  should  vary  inversely  with  the  amount  of  moisture  it 
contains.  The  storage  of  corn  involves  loss  from  mice,  rats,  and  other 
vermin.  The  interest  on  the  money  one  could  realize  from  the  corn  if 
sold  is  another  inducement  to  sell  early  rather  than  hold  the  crop. 
These  and  other  factors  tend  to  keep  the  normal  price  of  corn  lower 
after  harvest  than  at  other  seasons  of  the  year. 

The  price  situation  in  1908  requires  some  explanation  besides  the 
condition  of  the  supply.  The  crop  of  1907  was  smaller  than  that  for 
1905  or  1906,  but  larger  than  the  crop  for  1900,  1903,  and  1904,  which 
crops  created  no  abnormal  condition  on  the  corn  market.  '  The 
explanation  must  be  sought  in  changed  conditions  of  demand. 

The  demand  which  is  effective  in  making  com  prices  is  not  limited 
to  that  made  by  manufacturing  industries  which  use  corn  as  a  ra\f 
material,  and  that  buy  corn  upon  the  market.  The  demand  made  by 
livestock  upon  the  farmers  where  the  corn  is  produced  is  of  first 
importance.  Taking  the  average  for  the  years  from  1900  to  1909, 
inclusive,  52  per  cent  of  the  corn  crop  was  consumed  within  the 
county  where  grown,  before  March  i  of  the  year  following  its  pro- 
duction. Twenty  per  cent  had  been  sold  and  38.2  per  cent  was  in 
the  hands  of  the  farmer  on  March  i. 


VALUE 


389 


There  is  a  close  relation  between  com  production  and  the  swine 
industry.  The  important  regions  of  swine  production  are  in  the  corn 
belt.  But  it  should  be  noted  also  that  some  parts  of  the  corn  belt  are 
not  so  important  in  swine  production  as  others.  Central  Illinois,  for 
example,  shows  great  concentration  of  corn  production,  but  the  swine 
industry  is  of  relatively  small  importance  in  this  region. 

There  seems  to  be  a  division  of  territory  within  the  corn  belt  with 
regard  to  the  methods  of  realizing  on  the  com  crop.     Illinois  sells 


Fig.  5. — The  acreage  of  the  corn  crop  of  the  United  States  is  shown  by  the 
left-hand  bar  for  each  year  and  the  annual  crop  in  bushels  by  the  right-hand  bar. 
The  ratio  between  area  and  yield  is  such  that  the  two  bars  would  be  equal  when 
the  average  yield  is  twenty-five  bushels  per  acre.  The  two  curves  show  the 
high  and  low  prices  of  com  at  Chicago  for  the  period,  1900  to  1910. 


more  than  twice  as  large  a  proportion  of  her  corn  crop  as  does  Iowa.' 
This  may  be  explained  in  part  by  the  fact  that  Illinois  is  more  centrally 
located  with  respect  to  the  brewing,  distilling,  and  other  industries 
which  consume  corn.  Nearness  to  Chicago,  the  greatest  corn  market, 
is  also  a  factor  tending  to  make  this  condition  the  normal  one. 

The  demand  for  corn  by  the  swine  industry  varies  with  the  price 
of  hogs.     The  feeding  of  corn  to  hogs  was  unusually  profitable  during 

•  Yearbook,  U.S.  Department  of  Agriculture,  1909,  p.  437. 


390 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


the  years  1906  and  1907.  This  stimulated  the  swine  industry  until 
the  number  of  hogs  to  be  fed  from  the  1907  crop  was  the  greatest  ever 
known  in  America  (Fig.  6).  The  hogs  required  so  nearly  all  the  corn 
that  the  supply  available  for  industrial  purposes  was  very  small.  A 
hog  half  grown  has  to  be  prepared  for  the  market  even  if  the  price  it 
will  bring  would  not  justify  the  rearing  of  the  pig,  for  the  only  way  to 
realize  anything  on  the  investment  already  made  in  producing  half- 


FiG.  6. — Relation  of  the  price  and  supply  of  hogs  to  the  price  of  com  at 
Chicago.  The  price  curves  are  so  drawn  that  when  one  bushel  of  com  produces 
ten  pounds  of  pork  the  amount  which  the  hog-price  curve  rises  above  the  com- 
price  curve  represents  the  net  return  for  the  extra  labor  of  breeding  and  feeding. 
In  1906  and  1907  there  was  large  profit  in  feeding  com  to  hogs,  while  in  1908  there 
was  a  loss.  The  figures  on  the  margin  represent  the  monthly  high  price  of  com 
in  cents  per  bushel,  the  monthly  high  price  of  hogs  in  tenths  of  cents  per  pound, 
and  the  monthly  receipts  of  hogs  in  tens  of  thousands. 


grown  hogs  is  to  continue  adding  to  the  investment  until  they  can  be 
marketed.  In  1908  this  required  the  feeding  of  high-priced  corn  to 
relatively  low-priced  hogs.  Farmers  fed  corn  to  hogs  with  the  feeling 
that  they  would  have  made  more  money  had  they  sold  the  com.  This 
condition  resulted  in  a  decline  in  swine  breeding.  The  resulting  reduc- 
tion in  the  demand  for  corn  for  the  feed  lot,  accompanied  with  an 


VALUE  391 

increased  production  of  com,  brought  into  operation  the  forces  which 
explain  the  present  downward  trend  of  prices  on  the  com  market. 

The  corn  region  of  the  United  States  is  limited  on  the  north  and 
on  the  west  by  climatic  conditions,  but  in  the  south  the  limit  is  set  by 
the  competition  of  cotton.     Cotton  and  com  occupy  the  same  position 
in  the  system  of  crop  rotation.     They  are  both  crops  wliich  can  be 
cultivated  while  growing  and  which  for  this  reason  can  be  called 
cleansing  and  tilth-giving  crops.     Without  a  crop  of  this  kind  in  the 
rotation  it  becomes  necessary  to  introduce  the  summer  fallow  into  the 
rotation.    The  purpose  of  the  fallow  is  to  give  opportunity  for  culti- 
vating the  land  in  order  to  clear  it  of  weeds  and  bring  it  into  good  tilth. 
Not  only  do  corn  and  cotton  occupy  the  same  place  in  the  field 
system,  but  they  both  require  the  attention  of  the  farmer  at  the  same 
time.     This  means  that  with  a  given  land  and  labor  supply  the  com 
can  be  increased  in  the  cotton  belt  only  by  decreasing  cotton  produc- 
tion, and  vice  versa.     When  the  price  of  com  is  very  high  relative  to 
the  price  of  cotton  the  acreage  of  com  can  be  increased  in  the  cotton 
belt.    It  happened  that  the  high  price  of  corn  was  contemporaneous 
with  the  extension  of  the  ravages  of  the  boll  weevil  into  the  cotton 
regions  of  Mississippi  and  Louisiana.    These  two  forces  operated 
together  in  making  corn  better  able  to  compete  with  cotton.    To 
these  conditions  in  part  it  is  to  be  attributed  that  the  corn  acreage  of 
1910  was  much  greater  than  in  1908.     In  the  United  States  as  a  whole 
the  acreage  increased  12.  i  per  cent.     In  Iowa  the  increase  was  4.5 
per  cent,  in  Illinois  12.3  per  cent,  while  the  increase  was  16.6  per 
cent  in  South  Carolina,  15.5  per  cent  in  Alabama,  21.9  per  cent  in 
Mississippi,  and  45 . 6  per  cent  in  Louisiana. 

106.    ORGANIZED  SPECULATION  AND  ITS  REGULATION* 

THE  SERVICE  OF   ORGANIZED   SPECULATION 

Laying  aside  the  gusts  and  eddies  of  speculation  and  the  choppy 
movements,  it  will  be  found  that,  notwithstanding  the  manipulations 
that  take  place,  the  prices  of  commodities  vary  with  the  demand 
and  supply  as  shown  by  the  net  visible  supply  in  store. 

In  the  diagram  is  sho^vn  a  curve  representing  the  yearly  average 
prices  and  another  representing  the  variations  in  the  visible  supply. 

'  Adapted  from  H.  H.  Brace,  The  Value  of  Organized  Speculation,  pp.  132- 
33.  138-40,  178-79.     Houghton  Mifflin  Co.,  1913. 

[See  also  Selection  100:  "Organized  Exchanges:  Futures,  Puts,  and  Calls," 
and  Selection  228:  "Hedging  as  an  Insurance  Against  Risk." — Editoks.] 


392 


MATERIALS  KOK  ELExMENTARY  ECONOMICS 


The  curve  representing  visible  supply  has  been  reversed,  so  that 
when  it  bends  do^^^l^vard,  it  shows  that  the  supply  is  growing  larger, 
and  when  it  bends  upward,  a  smaller  supply  is  indicated.  The  reason 
the  curve  was  made  to  vary  in  this  way  is  because  an  increase  in  the 
visible  supply  is  a  bearish  indication,  and  a  decrease  is  a  bullish  indica- 
tion. If,  then,  the  price  of  wheat  goes  down  with  an  increase  in  the 
visible  supply,  and  goes  up  with  a  decrease,  the  curves  as  arranged 
would  indicate  it,  and  suggest  that  the  market  did  move  in  harmony 
with  the  demand  and  supply  as  revealed  in  the  visible. 


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1 

By  examining  the  diagram  the  reader  will  see  that,  while  there 
is  by  no  means  a  proportionate  variation  between  the  two  curves, 
their  most  important  movements  are  coincident.  Furthermore,  it 
is  seen  that  prices  have  a  tendency  to  move  sooner  than  the  visible 
supply,  thus  indicating  that  the  market  leaders,  from  the  reports 
of  crops  and  acreage,  together  with  other  indications  of  prospective 
change  in  demand  and  supply,  were  able  to  predict  what  the  visible 
would  be,  and  hence  to  initiate  a  price  movement  before  the  demand 
and  supply  of  the  actual  commodity  were  reflected  in  the  visible. 

If  trade  were  really  free,  if  all  dealers  and  producers  acted  with 
judgment  and  discretion,  and  if  the  facilities  at  hand  for  conducting 
each  business  were  in  all  cases  perfect;  then  speculation,  as  well  as 
any  business,  would  show  belter  results  to  the  community.     One  of 


VALUE  393 

the  duties  of  organized  speculation  is  to  fix  prices  upon  a  legitimate 
commercial  basis  and  to  provide  for  their  continued  adaptation  to  the 
movements  of  trade  and  industry.  It  must  be  confessed  that  the 
result  is  accomplished  but  indifferently.  The  reason  is  principally 
found  in  the  fact  that  the  similarity  of  the  business  to  gambling  leads 
into  the  market  all  kinds  of  adventuring  traders  who  have  not  given 
serious  and  painstaking  study  to  the  question  of  the  fluctuations  of 
prices  and  market  improvements. 

Some  of  the  important  movements  of  prices  under  organized 
speculation  are  due  to  the  trading  of  the  amateurs  or  unskilled  opera- 
tors just  mentioned.  The  great  number  of  purchases  and  sales  that 
they  make,  most  of  them  being  based  solely  on  mere  whim  or  caprice, 
causes  an  exceedingly  erratic  market  with  numerous  rapid  minor 
declines  and  advances.  But  the  professional  speculators,  many  of 
whom  deal  in  the  actual  commodities,  have  sufficient  nerve  and  skill 
to  anticipate  the  larger  reactions  and  cycles  and  so  to  narrow  down 
many  of  the  wider  swings  of  the  market  and  keep  it  within  closer 
limits. 

As  a  price  regulator,  therefore,  organized  speculation  has  some 
excellences  mixed  with  serious  faults.  Organization  tends  to  make 
any  activity  more  effective;  and  the  principal  task  accomplished  by 
the  speculator,  whereby  he  stops  a  decline  by  his  purchases  and  an 
advance  by  his  sales,  is  facilitated  by  giving  him  the  opportunity  not 
only  to  buy  before  he  sells,  but  also  to  sell  before  he  buys.  On  the 
other  hand,  the  extreme  ease  with  which  a  deal  may  be  made  upon  a 
speculative  exchange  and  the  small  capital  required  are  attractive 
influences  upon  the  unskilled  speculators,  whose  operations  cause  most 
of  the  confusion  and  erratic  fluctuations  seen  in  speculative  markets. 
These  amateur  speculators,  while  losing  their  own  money,  derange 
the  market,  creating  tendencies  which  even  the  wealthy  professional 
speculators  only  partially  overcome. 

The  indirect  effects  of  the  facilities  afforded  by  organized  specu- 
lation upon  the  world  of  commerce  exhibit  its  value  in  a  better  light 
than  the  direct  effect  of  fixing  prices.  While  the  prices  made  are 
subject  to  criticism  in  that  they  are  often  artificial,  the  business  of 
the  exchanges  is  so  closely  articulated  to  the  outside  commercial 
world  that  it  works  with  the  utmost  smoothness  in  relieving  the  busi- 
ness community  of  many  of  the  uncertainties  of  business. 

The  speculative  exchanges  furnish  a  continuous  market  in  which 
all  transactions  can  be  liquidated  during  exchange  hours.    This 


394  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

important  service  makes  Wall  Street  the  center  of  the  financial  sys-, 
tem,  as  it  is  the  only  place  in  which  financial  error  may  be  atoned  for 
and  freely  liquidated.  It  gives  stability  to  the  loan  market,  and 
renders  possible  the  enormous  business  of  lending  upon  stocks, 
securities,  warehouse  receipts,  and  other  collateral,  its  excellence  as 
an  agency  in  facilitating  this  business  being  indorsed  by  the  banks. 
The  stock  exchange  does  not  cause  panics,  but  saves  us  from  the 
worse  effects  of  them,  as  it  bears  the  burden  and  takes  the  responsi- 
bility when  the  worst  results  of  financial  excesses  are  threatened. 

The  exchange  market,  not  only  for  commodities  but  for  securities, 
furnishes  the  place  where  hedging  in  all  its  various  forms  may  be 
best  undertaken.  It  serves  to  knit  together  all  business  and  gives 
a  wide  field  to  the  principle  of  insurance.  It  is  especially  valuable 
in  giving  the  small  business  house  the  necessary  security  in  doing 
business,  so  that  it  may  compete  successfully  with  its  larger  rivals. 

The  exchange  gives  free  play  to  the  modern  principle  of  specializa- 
tion. It  produces  a  world  market  where  broad  conditions  are  given 
due  weight,  and  which  serves  as  the  basis  of  all  markets,  but  it  leaves 
to  local  influences  the  special  task  of  adapting  these  world  prices  to 
the  conditions  of  a  particular  place.  The  prices  fixed  upon  the 
exchanges,  from  the  broad  vision  of  those  who  make  them,  serve  well 
to  direct  commerce  in  its  important  divisions,  and,  in  the  course  of 
trade  as  reflected  in  market  quotations,  a  prophecy  is  given  in  regard 
to  business  conditions  which  it  would  be  well  for  all  to  heed.  The 
speculative  process  reduces  costs  and  husbands  resources,  building 
up  a  stock  of  commodities  for  use  in  case  of  crop  failure  or  other  dis- 
aster. The  means  adopted  to  accomplish  this  purpose  are  of  the 
most  modern  type.  Publicity  is  a  prominent  feature;  and  the  central 
idea  in  all  the  activities  of  the  exchange  is  to  give  free  play  to  com- 
mercial forces,  to  unite  without  restricting,  to  promote  solidarity 
without  crushing  the  individual. 

The  fault  which  is  most  often  found  with  organized  speculation 
is  that  it  favors  short  selling,  and  consequently  many  favor  the  aboli- 
tion of  that  practice.  But  it  would  appear  that  when  the  liberty  either 
to  buy  or  to  sell  according  to  the  opinion  of  the  trader  upon  the  market 
is  restricted,  the  idea  of  a  free  exchange  has  been  lost  sight  of.  For 
organized  speculation  exists  in  order  to  make  prices;  and  the  principle 
upon  which  it  is  based  is  that  the  best  method  to  give  freedom  in 
price-making  is  to  afford  the  greatest  facility  to  all  parties  to  make 
such  bids  and  offers  as  they  wish. 


VALUE  395, 

Prohibiting  short  selling  will  result  in  removing  the  most  impor- 
tant check  which  keeps  a  bull  market  from  rising  to  unreasonable 
limits,  and  moreover  the  result  would  be  that  when  the  market  turned 
and  everybody  began  to  sell  it  would  fall  to  unreasonable  depths  since, 
short  selling  having  been  prohibited,  there  would  be  no  buying  on 
the  part  of  shorts  seeking  to  cover.  Thus  a  market  where  short  selling 
has  been  prohibited  is  a  one-sided  market  and  such  a  market  is  one- 
sided going  up  and  one-sided  coming  down.  It  is  impossible  to  make 
the  market  so  that  all  deals  must  in  every  case  be  purchases.  By 
attempting  such  a  thing  the  principal  effect  is  to  bunch  the  persistent 
buyers  at  one  time  and  the  persistent  sellers  at  another.  The  only 
method  by  which  this  condition  can  be  avoided  is  to  permit  such 
freedom  in  trading  that  selling  and  buying  stand  on  the  same  plane, 
so  that  one  may  sell  before  he  buys  or  buy  before  he  sells  with  equal 
facility. 

If  we  go  to  the  extreme  of  abolishing  organized  speculation  alto- 
gether we  may  gain  to  the  extent  of  checking  one  form  of  gambling, 
yet  we  should  lose  the  many  advantages  obtained  by  organized 
speculation.  It  would  result  in  prices  being  fixed  in  a  crippled  and 
restricted  market,  the  transfer  of  risks  by  means  of  hedging  to  those 
who  specialize  in  risk  taking  would  be  prevented  and  this  would  prove 
a  special  hardship  for  the  small  producer  who  is  less  prepared  to  meet 
such  risks  than  the  large  producer,  and  finally,  as  experience  in  Ger- 
many and  elsewhere  has  shown,  such  a  measure  would  simply  be 
evaded  and  in  all  probability  cause  more  injury  than  benefit  to  the 
commercial  world. 

The  only  alternative  which  would  be  acceptable  to  organized 
speculation  as  it  exists  today  would  be  a  reformed  system  which 
retained  the  essential  features,  but  eliminated,  so  far  as  possible, 
the  uncommercial  practices  which  have  such  unwelcome  prominence 
in  large  commercial  exchanges.  Institutions  which  have  only  the 
outward  forms  of  exchanges  should  be  dissolved  or  else  made  into  true 
exchanges.  Uncommercial  practices  and  all  manipulation  should  be 
discouraged  or  prohibited;  and  amateurism,  the  greatest  cause  of  the 
evils  of  organized  speculation,  should  be  eliminated,  even  at  the 
expense  of  much  effort  on  the  part  of  legislatures  and  of  the  exchanges 
themselves. 

The  best  method  to  pursue  in  discouraging  the  illegitimate  use 
of  organized  speculation  is  to  encourage  its  legitimate  use.  The 
idea  should  be  instilled  into  the  minds  of  traders  that  the  exchanges 


3Q6 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


are  places  for  the  transaction  of  business,  not  for  gambling  or  any 
form  of  robbery  or  extortion.  No  attempt  should  be  made  to  force 
the  amateur  speculator  or  person  of  risk-taking  propensities  to  avoid 
all  risks,  but  he  should  be  encouraged  to  take  those  which  are  necessary 
and  for  the  good  of  the  community,  and  so  to  educate  himself  in  risk 
taking  that  he  will  cease  to  be  an  amateur.  If  the  adventuring  traders 
are  led  to  substitute  the  necessary  risks  of  commerce  for  their  reckless 
gambling  venture  there  will  remain  but  little  to  make  the  service 
of  the  exchanges  truly  ideal.  Most  of  the  other  reforms  suggested  are 
but  methods  of  accomplishing  this  important  one.  In  short,  it  is 
through  educating  the  people  in  the  proper  use  of  organized  speculation 
considered  as  a  commercial  instrument  that  reforms  can  best  be 
accompHshed. 

In  effecting  these  reforms  the  difficulties  of  securing  legislative 
action  could  be  avoided  if  the  better  element,  acting  through  thf 
regularly  constituted  authority  of  the  exchanges,  were  to  pursue  a 
consistent  policy  in  the  direction  indicated.  The  measures  taken 
should  not  proceed  to  startling  lengths  at  first.  It  is  only  by  gradual 
stages  that  an  institution  which  has  been  perverted  can  be  brought  to 
its  true  and  beneficent  purpose.  Speculation  so  organized  that  the 
transactions  will  be  legitimate  and  perform  a  service  offers  the  only 
acceptable  alternative  to  the  system  of  organized  speculation  as  it 
exists  today. 


107.    A  COST  DIAGR.\M 


Selling  price  $775. 

Total  cost  $675 

.Total  production  cost  $625 


.^  Prime  or  direct  cost_^i 

$400  ' 


Direct 

Materials 
$200 


Direct 

Labor 

$200 


Production  overhead 


Depart- 
ment 

Expense 
$100 


Factory 

Expense 

$75 


General 

Expense 

$50 


Selling 
Expense 

$50 


Profh 

$100 


VALUE  397 

This  diagram  serves  to  illustrate,  by  purely  arbitrary  figures, 
the  component  elements  of  cost.  The  illustration  is  applicable  to 
a  case  where  the  plant  is  divided  into  factories  and  the  factories  into 
departments  so  that  the  overhead  on  a  specific  task  is  first  appor- 
tioned on  the  basis  of  the  work  in  a  particular  department;  the  task 
then  bears  its  proper  proportion  of  the  general  expense  in  that  factory 
and  finally  it  is  called  upon  to  bear  its  proper  share  of  the  general 
expense  of  the  whole  plant.     Finally  selling  expense  is  apportioned. 

io8.     ITEMS   ENTERING  INTO  COST* 

Let  us  consider,  if  you  please,  the  cost  of  production  from  the 
manufacturers'  standpoint.  What  is  it  and  what  does  it  involve  and 
how  shall  it  be  handled  ?  There  are  four  groups  that  enter  into  every 
factory  cost:  (i)  the  cost  of  labor;  (2)  the  cost  of  material;  (3)  burden 
cost  (or  overhead  charges) ;  (4)  selling  cost.  The  aggregate  of  these 
four  fixes  the  point  per  unit  of  product  where  profit  begins.  Let  us 
discuss  them  separately. 

I,      LABOR  COST 

First,  labor  cost.  In  a  modern  industry  this  is  often  not  the 
largest  element  in  cost  per  unit  of  their  product.  In  some  industries 
it  is  rarely  the  largest  element  in  unit  cost.  I  am  told  that  in  an 
American  locomotive  the  percentage  of  labor  cost  is  20  and  that  the 
percentage  of  material  cost  and  of  burden  and  overhead  charges  is  80. 

It  needs  only  the  statement  to  show  that  the  important  factor  in 
labor  cost  is  not  the  rate  of  wage,  but  the  rate  of  output.  It  is  not 
what  you  pay,  but  what  you  get  for  what  you  pay  that  counts. 

In  an  English  factory  I  found  a  screw  machine  making  bolts  of 
various  sizes,  and  a  boy  running  it  at  a  very  small  wage,  probably 
about  2  shillings  a  day.  I  stood  looking  at  the  boy  and  his  product; 
first,  twenty  5-inch  bolts,  and  then  twenty-five  |-inch  bolts,  and  then 
fifty  f-inch  bolts  and  then  five  or  six  i-inch  bolts,  and  then  back  to 
quarter-inch.  I  went  to  the  superintendent  and  said  to  him,  "That 
boy  is  costing  you  more  than  a  man  who  earns  $3  a  day  would  in  one 
of  our  shops."  He  said,  "Why?"  I  said,  "His  time  is  used  in 
altering  tools.  He  is  'breaking  up,'  as  we  say,  altering  his  machine 
from  time  to  time  and  stopping  his  processes  10  to  15  times  a  day." 

'  Adapted  from  a  speech  by  William  C.  Redfield  in  the  House  of  Representa- 
tives, June  12,  191 1.    Congressional  Record,  62d  Congress,  ist  session,  Vol.  XLVII 
Part  II,  pp.  1941-45. 


398 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


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let  him  run  all  day  on  that,  and  the  next  morning  give  him  another 
size;  do  not  stop  your  machines,  but  run  them  steadily  on  one  size." 


VALUE  399 

One  of  the  things  I  should  like  to  burn  into  your  thought  is  this — 
the  essentially  variable  quality  of  cost.  It  can  not  be  talked  about 
as  a  fixed  thing.  Cost  is  everywhere  and  always  variable,  at  every 
time  and  in  every  place. 

Output  varies  with  the  character  of  the  workmen,  the  equipment, 
its  arrangement,  or  other  local  conditions,  with  the  nature  of  the 
superintendence,  with  the  discipline,  and  so  forth.  It  is  absurd  to 
assume  that  work  done  by  a  man  paid  $4  daily  costs  more  per  annum 
than  work  done  by  a  man  paid  $2  daily.  It  may  be  more  or  less 
costly,  and  depends  upon  other  conditions.  Therefore,  because  cer- 
tain goods  are  produced  at  a  certain  labor  cost  per  unit  when  the 
A7age  rate  is  $3  per  day  in  a  certain  place,  it  can  never  be  argued  that 
the  same  wage  rate  on  similar  goods  results  in  a  like  labor  cost  per 
unit  in  another  place.  It  may  vary  from  10  to  50  per  cent.  To  dis- 
cuss the  wage  rate  as  the  controlling  factor  in  labor  cost  per  unit  is 
both  inadequate  and  misleading.  The  railroads  are  a  very  notable 
example  of  this.  The  English  railways  have  vastly  cheaper  labor 
than  we,  but  their  freight  charge  per  ton-mile  is  two  and  one-half 
times  ours.  With  pride  the  Indian  railway  department  told  this  last 
winter  that,  though  their  labor  is  one-eighth  of  ours  in  cost  per  day, 
they  had  succeeded  in  getting  down  to  a  trifle  lower  freight  cost  per 
ton-mile  than  we.  They  had  been  years  at  it,  with  labor  one-eighth 
of  ours,  and  had  just  succeeded. 

Now,  the  question  as  to  a  manufacturer's  control  of  his  labor  cost 
apart  from  the  wage  rate  I  want  to  illustrate  by  examples. 

I  know  a  factory  in  which  the  product  was  doubled  in  two  years 
■without  adding  a  man  or  without  adding  a  machine.  And  this  is  the 
way  it  was  done:  The  men  had  been  paid  on  day  work.  The  labor 
men  have,  and  they  properly  have,  a  horror  of  piecework,  as  it  is 
commonly  administered,  because,  I  am  sorry  to  say,  manufacturers 
have  so  abused  the  piecework  principle  that  the  laboring  men  have 
justly  come  to  fear  it.  As  piecework  is  handled  in  most  factories  it 
ought  to  be  hated,  as  it  is  hated,  but  in  this  particular  factory  the 
head  of  the  concern  got  the  idea  that  he  could  save  by  guaranteeing 
his  men  a  high  wage.  He  said,  "We  will  guarantee  your  day  rates; 
you  shall  always  earn  your  present  day's  pay.  We  will  also  guarantee 
that  your  piecework  rates  shall  not  be  cut.  We  will  agree  with  one 
another  that  obvious  mistakes  will  be  corrected  either  way,  but 
if  you  earn  large  pay,  understand,  your  piecework  rate  shall  not 
be  cut." 


400  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

That  factory  operated  upon  that  basis  for  many  years.  The 
wages  of  some  men  went  up  to  $6,  and  in  some  odd  cases  even  to  $7 
a  day.  Now,  when  the  men  were  guaranteed  an  unlimited  earning 
rate,  see  what  happened.  The  manufacturer  said,  "There  is  the 
machine.  There  is  your  power.  Go  ahead.  Earn  all  you  can." 
Naturally,  the  first  result  of  that  was  largely  to  increase  the  product. 
Then  three  other  things  happened.  The  manufacturer  went  to  a 
man  and  said,  "Pat,  you  are  earning  pretty  good  wages.  It  does  not 
make  any  difference  to  me  what  you  earn.  The  more  you  earn  the 
better  for  us  both.  But  there  is  one  thing  you  can  not  afford,  and 
that  is  to  have  your  machine  shut  down  for  repairs.  It  hurts  me, 
and  it  hurts  you  every  hour  that  that  machine  is  idle,  and  your 
machine  is  of  that  particular  kind  and  engaged  in  that  particular  work 
that  kno-^ks  it  to  pieces  if  it  is  not  properly  taken  care  of.  Every 
hour  it  is  delayed  in  operation  it  hurts  both  you  and  me."  Says  Pat, 
"  What  is  it  that  you  want  ?  "  "I  want  you  to  spend  about  15  minutes 
before  work  starts  every  morning  in  overhauling  that  machine  in  your 
own  interest.  Do  not  let  it  get  into  such  shape  that  it  will  need 
repairs." 

I  cannot  tell  you  the  exact  number  of  thousands  of  dollars  per 
annum  that  was  saved  in  that  factory  in  that  simple  way,  but  it  was 
several  times  $10,000  a  year,  just  that  item  of  examining  carefully 
the  machines  every  morning  before  beginning  regular  operations. 

In  the  next  place,  the  system  of  using  fuel  had  been  more  or  less 
careless  in  this  shop.  The  manufacturer  went  to  his  workmen  and 
said  to  them,  "  Boys,  you  are  not  going  to  be  cut,  no  matter  what  you 
earn.  You  cannot  afford  to  waste  time  in  firing  improperly.  You 
must  be  careful."  His  men  did  as  instructed.  At  the  end  of  three 
or  four  weeks  about  an  hour  and  a  quarter's  time  was  saved  each  day, 
amounting  to  one-eighth  of  the  operating  time  of  that  part  of  the 
plant,  besides  a  saving  of  fuel. 

In  most  factories  the  element  of  defective  goods  is  a  large  element 
of  cost.  This  manufacturer  went  to  his  men  and  said,  "Boys,  you 
are  well  paid.  There  is  no  limit,  practically,  to  what  you  can  earn. 
But  it  is  not  fair  on  that  basis  to  make  any  bad  goods."  The  men 
thought  the  matter  over  among  themselves,  and  finally  they  came 
to  him  and  said,  "What  is  it  you  want?"  and  he  said,  "I  want  you 
to  replace  the  bad  goods  on  your  own  time  and  to  replace  the  ma- 
terial that  you  waste."  And  right  there  were  saved  several  thousand 
dollars  more  in  the  course  of  a  year. 


VALUE  401 

In  those  ways,  without  touching  the  rate  of  wage,  the  output  of 
that  factory  went  up  double  in  two  years;  and  the  same  thing,  to  a 
greater  or  less  degree,  depending  upon  different  circumstances,  is 
possible  everywhere.  But  someone  will  say  about  the  case  I  have 
quoted  that  there  must  have  been  lax  management  theretofore.  I  can 
assure  him  that  was  not  the  case. 

Labor  cost  per  unit  varies  with  time  and  place,  and  in  the  same 
shop  is  constantly  changing.  It  is  unlike  in  each  of  several  mills 
producing  the  same  goods,  belonging  to  the  same  company.  A 
superintendent  who  would  take  three  mills  making  the  same  goods, 
under  the  same  ownership,  in  three  different  cities,  and  get  the  cost 
alike  would  be  a  wonder.  For  example,  I  have  in  mind  two  factories, 
belonging  to  the  same  concern,  where  for  two  years  it  has  been  a 
constant  effort  to  get  the  costs  alike  in  making  the  same  goods.  But 
what  are  you  going  to  do  when  in  one  factory  power  costs  three  times 
as  much  as  it  does  in  the  other? 

Labor  cost  is  affected  by  sanitary  and  climatic  conditions.  It 
varies  with  the  quantity  and  the  quality  of  the  output,  and  it  can 
never  be  assumed  that  it  is  at  the  close  of  the  year  what  it  was  at  the 
beginning  of  the  year  in  the  same  shop.  It  is  enormously  modified 
by  the  progress  of  invention.  The  labor  cost  in  your  shop  in  January 
may  be  in  some  respects  entirely  wiped  out  by  July.  The  labor  cost 
in  July  may  be  entirely  altered  by  December;  else  what  is  your  pur- 
chasing agent  for,  and  for  what  purpose  are  you  feeling  out  all  over 
the  world  for  the  latest  machinery  ? 

Labor  cost  varies  with  the  arrangement  of  machinery  within  the 
shop.  It  is  affected  by  the  space  available.  It  varies  with  changes 
in  material,  with  the  sufficiency  and  the  regularity  of  the  supply  of 
material  and  its  suitability  to  the  work.  And  the  labor  cost  of 
Monday  when  the  stock  runs  out  Monday  afternoon  and  new  stock 
comes  in  Tuesday  is  not  the  same  on  Tuesday  that  it  was  on  Monday. 
The  steel  mill  may  have  made  an  error  and  your  labor  cost  go  flying 
up  for  the  time.  And  I  am  speaking  now,  gentlemen,  from  an  expe- 
rience in  figuring  labor  costs  to  hundredths  of  a  cent  per  unit. 

Labor  cost  is  affected  by  the  lighting  and  the  power  equipment  of 
the  shop,  and  will  change  with  the  going  of  one  superintendent  and  the 
coming  of  another.  I  am  sure  I  need  only  to  say  these  things  one  after 
the  other  to  have  their  entire  reasonableness  made  plain  to  you  all. 

Labor  cost  will  alter  radically  within  a  month,  by  the  introduction 
of  new  tools,  new  machinery,  or  the  change  of  a  process,  even  to  the 


402  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

extent  of  having  a  whole  process  eliminated.  It  varies  with  the 
wastefulness  of  material  used  in  producing  an  article,  excessive  use 
of  supplies,  the  loss  of  time  and  material  occasioned  in  making 
defective  goods;  and  every  one  of  these  items  has  to  be  carefully 
watched  by  any  alert  manufacturer. 

The  labor  cost  is  affected  by  methods  of  paying  (by  piecework  on 
a  righteous  basis,  and  by  day's  work  on  an  unrighteous  basis)  and  by 
a  just  and  considerate  application  of  the  methods  of  paying  apart 
from  the  amount  paid. 

Labor  cost  is,  therefore,  a  variable  element.  It  cannot  be 
measured  by  any  fixed  standard. 

But  labor  cost  in  any  factory  is  both  direct  and  indirect,  as  will 
be  made  plain;  upon  the  proper  adjustment  of  one  to  the  other 
depends  in  a  degree  the  labor  cost. 

n.      MATERIAL   COST 

ReaflBrming,  therefore,  that  in  many  industries  the  unit  cost  of 
labor  is  not  the  largest  element  of  the  total  unit  cost,  but  may  be  a 
small  percentage  thereof,  we  pass  to  consider  the  cost  of  material.  This 
is  the  most  fixed  of  all  the  elements  of  cost,  but  only  a  little  thought 
is  needed  to  show  that  this,  too,  is  variable.  In  two  shops,  one  buying 
in  large  quantities  and  the  other  small  quantities  of  the  same  goods, 
the  price  of  the  material  will  vary.  In  two  large  shops  which  buy 
the  same  quantity,  but  have  buyers  of  different  skill  and  differing  in 
amount  of  free  capital  with  which  to  purchase,  the  cost  will  vary.  In 
two  shops  in  the  same  business,  but  located  differently  with  respect 
to  transportation,  the  cost  will  vary.  Within  the  shops  the  cost  of 
material  will  vary  with  the  handling  facilities  provided,  and  with  the 
space  available  for  storage.  The  cost  of  material  will  vary  with  the 
system  of  receiving  the  same  and  storing  it.  The  cost  of  material 
must  always  include  such  important  and  variable  items  as  freight, 
cartage,  wharfage,  demurrage,  and  the  like. 

The  cost  of  material  must  always  include  the  wages  of  the  store- 
keeper and  a  share  of  rental  for  the  space  occupied  by  it.  The  cost 
of  material  will  vary  also  with  such  depreciation  as  will  take  place  if 
it  is  not  protected  against  loss.  This,  therefore,  though  relatively  a 
fixed  quantity,  is  variable,  so  that  in  different  shops,  in  the  same  line 
of  business,  it  cannot  be  argued  that  the  net  material  cost  in  one 
even  approximates  that  in  another. 


VALUE  403 

The  cost  of  material  must  include  the  factory  supplies,  the  pur- 
chase, keeping,  and  management  of  which  is  an  important  and  com- 
plex element  of  cost  where  thousands  may  easily  go  out  of  sight. 
Consider  what  it  may  mean  to  have  one  purchase  of  bad  lubricating 
oil.  Its  use  on  valuable  and  delicate  machinery  may  cause  the  loss 
of  thousands  of  dollars  in  a  week. 

But  when  the  variable  items  of  unit  cost  of  labor  and  material  are 
combined  you  have  only  obtained  what  is  known  as  prime  cost,  or 
actual  outlay,  and  have  still  to  consider  two  serious  elements  in  cost, 
each  of  which  sometimes  amounts  to  a  larger  total  than  either  labor 
or  material,  and  sometimes  exceeds  both. 

in,      OVERHEAD  COST 

We  therefore  take  up,  third,  cost  of  burden  or  overhead  charges. 
This  is  often  ignored  or  not  appreciated  at  true  value.  More  concerns 
are  wrecked  by  failure  to  estimate  or  manage  it  properly  than  by  any 
other  single  cause  save  perhaps  insuf&cient  capital. 

Among  the  items  covered  in  burden  cost  are  such  as  these: 
Taxes  and  assessments,  repairs  to  buildings  and  machinery,  indirect 
labor,  superintendence,  experiments,  insurance  and  fire  protection — 
two  different  things — depreciation,  bad  debts,  accidents,  interest  and 
discounts,  power,  heat,  and  light,  and  legal  expenses,  every  one  of 
them  matters  needing  the  most  careful  attention,  if  they  are  to  be 
kept  within  reasonable  limits. 

A  large  concern  located  on  expensive  land  in  a  city  with  high  rates 
of  assessment  and  taxes  may  bear  a  burden  in  this  single  respect 
enough  to  pay  a  profit  on  the  entire  investment  of  a  small  concern 
more  favorably  placed;  but,  as  showing  the  complex  nature  of  this 
problem,  the  same  concern  may,  by  reason  of  its  equipment  and  its 
efficient  organization,  produce  goods,  though  paying  the  same  or 
higher  wages,  so  cheaply  as  to  overcome  this  handicap. 

Repairs  vary  with  the  character  of  the  buildings,  their  age,  their 
location,  with  climate,  and  with  respect  to  machinery,  with  the  care 
given  to  it.     In  some  industries  this  item  of  repairs  is  very  large. 

Indirect  labor  is  an  unfortunate  necessity  in  every  industry.  A 
cotton  mill  employs  carpenters  and  steam  fitters,  whose  presence  is 
necessary,  but  whose  expense  is  a  burden  on  the  output.  Every 
modern  shop  has  to  have  a  tool  room.  This  question  of  indirect  cost 
is  often  a  very  serious  one,  and  is  a  matter  requiring  the  closest  pro- 
fessional study. 


404  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  cost  of  superintendence  is  apt  to  be  heavy  in  proportion  as 
the  labor  is  cheap.  I  was  very  much  interested  in  what  the  gentle- 
man from  Connecticut  said  about  the  jute  mills  in  Calcutta  in  his 
recent  address,  because  only  eight  weeks  ago  I  was  in  those  jute  mills 
talking  with  the  superintendent.  I  find  it  a  very  excellent  plan,  if 
you  wish  to  get  at  the  details  of  a  factory,  to  avoid  the  owner.  I 
asked  this  gentleman  in  this  large  jute  mill  about  the  question  of  his 
labor.  He  said  it  was  cheap,  very  cheap.  I  said,  "Is  it  wasteful?" 
He  answered,  "Extremely  wasteful."  I  asked  him  in  what  other 
respect  it  was  bad,  and  he  said  it  was  bad  in  the  respect  that  it  required 
an  unusual  amount  of  European  superintendence — three  to  four  times 
as  much  as  they  would  give  in  Scotland. 

Experiments  looking  toward  new  or  better  output,  tools,  or 
machines  are  a  very  expensive  item  in  many  factories.  It  is  hardly 
necessar>'  to  say  that  insurance  varies.  An  old  wooden  mill  must 
charge  the  cost  of  its  output  with  many  times  the  unit  cost  for  insur- 
ance that  is  borne  by  goods  produced  in  modern  so-called  slow- 
burning  buildings.  The  actual  loss  from  fires,  over  and  above  that 
covered  by  insurance,  is  a  part  of  the  burden  cost  frequently  for- 
gotten and  of  uncertain  amount,  but  often  serious.  Depreciation  is 
a  large  item  of  cost,  amounting  often  to  as  much  as  lo  per  cent  per 
annum  of  the  entire  value  of  the  machinery,  buildings,  and  other 
equipment,  varying  with  conditions.  Sometimes  neglected  by  manu- 
facturers, it  forms  a  burden  of  a  self-enforcing  character,  which,  if  not 
reckoned  as  an  annual  addition  to  the  burden  cost,  will  come  in  a 
lump  sum  whenever  machinery  or  buildings  must  be  replaced.  The 
loss  arising  through  machinery  thrown  out  of  date  by  new  inventions 
is  a  serious  part  of  burden  cost  frequently  forgotten.  The  loss  arising 
from  the  continued  use  of  antiquated  and  slow-producing  apparatus 
is  another  large  part  of  burden  cost. 

This  question  of  slow-producing  apparatus  is  sometimes  by  itself 
alone  ver>'  serious.  I  recall  one  large  sugar  refinery  in  New  York 
City  that  closed  on  that  account  alone.  I  recall  another  where  the 
single  item  of  cartage  was  so  great  it  had  to  go  out  of  business. 
I  recall  three  woolen  mills  that  stood  idle  for  years  because  their 
machinery  was  out  of  date  and  they  would  not  replace  it,  and  another 
that  was  idle  and  stood  idle  because  it  was  three  miles  from  a  railroad 
and  the  cartage  killed  it.  Those  are  the  things  that  do  it,  and  not 
the  difference  in  the  wage  rate. 


VALUE  405 

The  losses  from  accident  are  a  constant  terror  to  every  manu- 
facturer, and  yet  I  stood,  within  the  last  few  weeks,  in  a  factory 
claiming  high  protection  at  our  hands  here,  which  could  have  made 
a  profit  by  saving  in  handling  charges  alone,  but  which  stood  to  lose 
— ^or  lack  of  care  for  human  flesh  and  blood,  and  because  of  failure 
to  properly  protect  its  machinery — thousands  of  dollars  every  year. 

The  loss  arising  from  bad  accounts  is  present  in  every  business, 
and  varies  with  the  care  in  selling  goods. 

The  burden  charge  arising  from  interest  and  discounts  varies  with 
the  amoimt  of  free  capital  available  in  the  business.  I  do  not  refer 
to  the  interest  upon  bonds  or  the  interest  on  the  total  investment, 
with  which  some  concerns  charge  themselves  as  an  expense,  but  rather 
the  interest  that  is  to  be  paid  upon  real  estate  mortgages  and  upon 
money  borrowed  to  supply  working  capital  and  for  discounts  allowed 
customers  for  prepayment. 

Power,  heat,  and  light  vary  greatly.  The  source  of  power  is  so 
variable  that  no  general  statement  can  be  made.  For  example, 
power  from  water,  from  steam,  from  electricity,  or  from  gas  engines. 
I  am  interested  in  two  concerns  using  electric  power  largely.  One 
pays  5  cents  per  kilowatt  hour,  taking  it  from  steam;  the  other  i^ 
cents  a  kilowatt  hour,  taking  it  from  water,  a  difference  of  over  300 
per  cent  in  the  power  rate. 

It  will  be  seen  that  the  item  of  burden  cost  is  one  of  importance 
and  difficult  to  define.  It  is  one  in  which  every  manufacturer  is  very 
closely  interested,  because  it  very  often  affects  the  cost  of  his  pro- 
duction far  more  than  the  rate  of  wages  that  he  pays.  Manufac- 
turers, however,  are  very  apt  to  assume  the  burden  cost  to  be  less  than 
it  is.  Instead  of  making  a  careful  study  of  it,  they  take  what  seems 
to  be  the  obvious  course,  of  reducing  the  pay  roll,  instead  of  the  more 
economical  course  of  studying  closely  their  burden  charges.  Once 
my  partner  said  to  me,  "Although  your  department  of  this  business 
is  not  the  factory,  I  want  you  to  go  into  it  every  day  for  an  hour  or 
two,  simply  to  find  what  is  wrong."  And  for  ten  years  I  never  went 
a  day  that  I  did  not  find  something  that  could  be  bettered. 

Who  shall  calculate  accurately  the  difference  in  labor  cost  in  a 
large  factory  between  the  output  of  a  force  of,  say,  1,000  mechanics, 
well  paid,  well  equipped,  well  housed,  with  ample  light  and  power, 
with  machinery  well  arranged,  with  material  exactly  suited  to  their 
purposes,  with  management  that  wins  the  loyalty  and  enthusiasm  of 


4o6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  menhy  liberal  pay  and  just  treatment,  and  the  output  of  an  equal 
force  of  men  working  in  poor  light,  with  variable,  insuflBdent  power, 
poor  equipment,  with  wages  cut  to  the  smallest  limit,  with  improper 
sanitary  conditions  and  harsh  treatment  ? 

The  difference  between  the  output  under  above  conditions  may 
be  the  difference  between  ruin  and  dividends.  You  cannot  confine 
human  nature  within  the  limits  of  a  wage  rate.  Wholly  outside  of 
the  rate  of  pay  there  is  unlimited  scope  for  brains  in  manufacturing. 

IV.      SELLING   COST 

But  in  all  this  we  have  merely  produced  our  goods  and  laid  them 
at  the  factory  door.  They  are  not  yet  sold,  and  before  their  sale  takes 
place  another  serious  element  of  cost  must  be  added.  Therefore  we 
must  discuss  selling  expense.  This  selling  expense  is  sometimes  as 
large  as  the  entire  cost  of  labor,  material,  and  burden. 

I  have  only  to  mention  to  you  what  it  costs  to  sell  automobiles  in 
order  to  get  your  immediate  assent  to  that.  Selling  cost  includes 
such  items  as  traveling  expenses,  commissions,  advertising,  office 
salaries  and  rental,  postage  and  stationery,  packing  and  shipping 
expense,  office  equipment,  office  heat  and  light,  and  similar  items. 
I  need  only  mention  these  to  show  at  once  that  they  are  of  a  very 
variable  character.  In  some  lines  the  cost  of  advertising  alone  is 
equal  to  the  combined  cost  of  all  things  else  put  together.  In  some 
industries  traveling  expenses  are  a  very  heavy  item.  Office  expenses 
are  very  high  in  other  industries,  and  in  others  office  expenses  might 
well  be  greater  if  they  would  so  insure  the  ascertainment  and  reduction 
of  burden  cost. 


VALUE  407 

109.    ANALYSIS  OF  THE  RETAIL  PRICE  OF  EGGS  IN 
NEW  YORK  CITY' 

The  various  items  of  expense  to  be  included  under  middleman 
charges  for  the  handling  of  eggs  in  New  York  City  have  been  set  forth 
in  a  report  recently  issued  by  a  committee  of  the  New  York  State 
Food  Investigating  Commission,  and  are  indicated  in  the  following 
table  which  is  quoted  almost  exactly.  This  table  is  supposed  to  show 
the  accumulation  of  charges  on  eggs  based  on  a  hypothetical  basic 
price  of  twenty  cents  per  dozen. 

Producer's  price $0. 20         $0. 20 

Shipper's  charges: 

o)  Labor  in  collection  and  packing .  005 

b)  Cases,  fillers,  and  packing 0073 

c)  Transportation  charges  to  city 0106  .  023 

Commission  for  handling 01  .01 

Jobber's  charges: 

c)  Cartage  from  dock  to  store 00133 

b)  Candling  and  grading 00666 

c)  Storage  and  insurance 016 

d)  Jobber's  profit  and  charges 01 

e)  Delivery  to  the  retailer 004  .  038 

Retailer's  charges: 

a)  Operating  expenses,  10  per  cent 0271 

b)  Retailer's  profit,  5  per  cent 01497        •  042 

Price  paid  by  consumer $0. 313 

•  From  C.  W.  Thompson,  "Technical  Studies  in  Egg-Marketing,"  Agricultural 
Experiment  Station  Bulletin  ij2.  The  University  of  Minnesota  (1913),  p.  38. 


4o3 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


iia     MIDDLEMEN'S    CHARGES    IN    MARKETING    AGRICUL- 
TURAL PRODUCTS'       " 


Product 

Appiis 

No.  I  Baldwin 

Afplu 

Eztn  fmcy  Jonathan 

Apples 

Best  No.  I  Baldwins 

Apples 

Jonathan 

Apples 

MtLK 

Milk 

Mnx 

Cal.  Oranges 

Alu  Crestae  (navel) 

Cal.  Oranges 

Ruby  Bloods 

Oranges  (aavd) 

Peaches 

Peanuts 

Potatoes 

Cal.  Potatoes 

Oregon  Stock 

Dressed  Poitltry 

(Broilers) 

Dressed  Poitltrt 

(Roasters) 

POITLTRT 

((Tapons) 

Poultry 

(Fowls) 

Rick 

Strawberries,  No.  i  . . 

Tomatoes 

Tomatoes 

Dressed  Turteys.  . . . 

Milk  (in  spring) 

Potatoes 


Where  Produced 


Marlboro, 
Mass. 

Wenatches 
Valley,  Wash. 

Maine 


No.  Yakima, 
Wash. 

Maine 

Montgomery 

Co.,  Pa. 
Middlesex  and 

Worcester 

Co.,  Mass. 
Worcester  Co., 

Mass. 
Bonita,  Cal. 


Bonita,  Cal. 

California 

Paonia,  Cal. 

Virginia 

Aroostook  Co., 

Me. 
California 

Eastern  Mass. 

Eastern  Mass. 

Eastern  Mass. 

Eastern  Mass. 

Arkansas 

Georgia 

Florida 

Mt.  HoUy.  N.J 


Northern  New 

York 
Cooperstown, 

N.Y. 
Mass. 


Where  Con- 
sumed 


Boston 

Chicago 

Liverpool 

Boston 

Portland 

Philadelphia 

Boston  and 
vicinity 

Boston 

Boston 

Boston 

New  England 

Denver 

Boston 

Cambridge, 
Mass. 

San  Fran- 
cisco 

Boston 

Boston 

Boston 

Boston 

Boston 
Boston 
Boston 

Philadelphia, 
N.E.  sec- 
tion 

Boston 

New  York 

City 
Cambridge 


Price  Re- 
ceived by 
Producer 


%2.JS   (bbl.) 

I.4S  (box) 

4.00  (bbl.) 

1.66  (box) 
(90-100  ap- 
ples) 
J. 00  (bbl.) 

Oil  (qt.) 

.04  (qt.) 

.oaf  (qt.) 
1 .61 J  (box) 

Loss  .068 
(box) 

1.07  (box) 

.245  (box) 

.04J  (lb.) 

.50  (bu.) 

.  70  (sack) 
(2  bu.) 

.33  ab.) 
.19 J  (lb.) 

.22?  ab.) 

.16  (lb.) 

.40  (bu.) 

.08-14 
(box) 
.35  (crate) 

■  377S' 
(basket) 

.25  (lb.) 

.025  (qt.) 

■  SS  (bu.) 


Price  Paid 
by  Con- 
sumer 


$7.50  (bbl.) 

8.00  (box) 

6.42  (bbl.) 

3.60  (box) 

6.00  (bbl.) 
.08  (qt.) 
.  10  (qt.) 

.08  (qt.) 
3 .  so  (box) 

2. 00  (box 

3.00  (box) 
.75  (box) 
.18  Gb.) 
.90  (bu.) 

1 .  so  (sack) 

.55  (lb.) 
.33  Ob.) 
.35  Ob.) 
.28  Ob.) 

4.i6|  (bu.) 

.15-25 
(box) 

2 .  10  (crate) 

.80 

.38  (lb.) 
.08  (qt.) 
.90  (bu.) 


Differ- 
ence 


>S  «5 

6.SS 

2.42 

1-94 

4.00 
.04I 
.06 

.05i 
1.888 

2.068 

1.93 
•  505 
.X3S 

■  40 
.80 

.22 

.13! 

."♦ 

.12 

3.76! 

.07-.  IX 

I-7S 

.4225 

.13 

■  05s 

■  35 


■  Adapted  from  T.  N.  Carver,  Principles  of  Rural  Economics,  pp.  330-33. 
Oinn  &  Co.,  1911. 


\'ALUE  409 

MIDDLEMEN'S  CHARGES  IN  MARKETING  AGRICULTURAL 

PRODUCTS    (Continued) 


Where  Does  the  Difference  Go  ? 

Picking.  $o.»s;   barrel,  fo.  25;   freight,  $0.25;   commission,  $0.25;   sorting,  $0.15;   labeling,  cart- 
ing, etc.,  |o.  10;  storage,  $0.50;  wholesaler,  $2.00;  retailer,  $1 . so 

Grower*'  Association,  $0.10;    railroad  rate  to  Chicago,  $0.50;    wholesaler,  $2.45;    retailer,  $3.50 

Barrel,  $q.  35;  freight,  commission  to  exporter,  salesman,  etc.,  $1 .00;  retailer,  $1 .07 

Growers'  Association  $0.09;    freight,  $0.50;   refrigerating,  So.xo;    expressage,  $0.05;    wholesaler, 
$o.u;  retailer,  $1.10 

Broker,  $0.50;  commission  man,  $1 . 50;  retailer,  f 3. 00 

Freight,  $o.oo|;  retailer,  $0.04 

Freight,  idng,  bottling,  $o.oo|;    wholesaler,  $o.02|;  retailer,  $o.ox;   delivery,  $o.oa 

Transportation,  $0.00^;  contractor,  $0.02};   peddler,  $0.0* 

Pickmg,  packing,  etc.,  $0.50;  freight,  $0,838;  auction  commission,  |o. 06;  retailer.  So. 50 

Picking,  packing,  etc.,  $0.50;    idng,  $0.31;    freight,  $0,838;   auction  commission,  $0.03;  retailer, 

$0.50 

Packing  and  selling,  $0.40;   freight,  $0.83;   half-refrigeration,  $0.10;   local  dealer,  $0.60 
Commissioa,  $0,045;   cost  of  box,  paper,  and  packing,  $0.14;   wholesaler,  $0.30;  retailer,  $0.13 
Freight,  $0,003;  wholesaler  (including  packing),  $0,018;  retaQer,  $0,115 

Bagging,  $0.01;  freight,  $0.1 2^;  wholesaler,  $0,064;  hauling  to  Cambridge,  $0.03;  retailer,  $0.17 
Freight,  $0.10;  commission  agent,  $0.36;  wholesale  and  retail  dealer,  $0.44 

Shipping  and  selling  commission,   $0.05;   wholesaler   (indudmg  cost  of  dressing,   shrinkage  etc.) 
$0.07;  retailer,  $0.10 

Shipping  and  sdling  commission,  $0.04};    wholesaler  (induding  cost  of  dressing,  shrinkage,  etc.), 
$0.04;  retailer,  $0.05 

Shipp>ing  and  selling  commission,  $0.03$;    wholesaler  (induding  cost  of  dressing,  shrinkage,  etc.), 
$0.04;   retailer,  $0.05 

Wholesaler  (induding  cost  of  dressing,  shrinkage,  etc.),  $0.07;  retailer,  $0.05 

Milling,  $0.33};    miller's  profit,  $0.31};   wholesaler's  expenses,  $0.15;   his  profit,  $1.00;   retailer's 

expenses,  $o.i6J;   his  profit,  $2.00 
Cost  to  land  them  in  Boston,  $0 .  03-$© .  05 

Railroad  rate,  $0.62;  cartage,  $0.03;  shipper,  $0.10;  commission  merchant,  $0.05;  packing,  boxing 

etc.,  $0.35;  jobber,  $0.15;  retailer,  $0.45 
Freight,  $0.05;  commission  agent,  $0.0335;  wholesaler,  $0.15;  retailer,  $0.30 

Local  agent,  $0.01}:  boxing  and  packing,  $0.01;   railroad  rate,  $0.01;   big  dealer,  $o.oii;  retailer, 

$0.08 
Local  haul,  $0,001;  shipping,  $0,009;  freight,  $0,005;  wholesaler  (who  is  also  the  distributor),  $0.04 

Packing,  $0.03;  commission,  $0.03;  railroad  transportation,  $0.05;  retailer,  $0 . 35 


4IO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

III.    COSTS  IN  THE  RETAILING  OF  SHOES' 

Gross  profit  so  far  encountered  ranges  from  20  per  cent  to  42  pei 
cent  of  the  net  sales,'  according  to  the  grade  of  goods  and  with  almost 
exactly  the  same  number  above  30  per  cent  as  below  30  per  cent. 
The  Bureau  of  Business  Research  is  inclined  to  think  that  under 
present  conditions  the  typical  gross  profit  of  shoes  retailing  at  or  under 
$3.50  will  be  found  to  nm  from  23  per  cent  to  25  per  cent  and  for 
those  retailing  above  that  price  a  percentage  of  from  30  to  33  is  the 
type. 

Gross  profit  as  treated  above  includes  discounts. 

Total  operating  expense  so  far  encountered  ranges  from  18  per 
cent,  or  possibly  a  little  less,  to  35  per  cent  of  the  net  sales  in  going 
concerns.  The  figures  as  a  whole  center  about  24  per  cent,  that  is, 
about  as  many  are  above  as  below  24  per  cent,  with  the  operating 
percentages  of  medium-grade  stores  centering  around  23  and  of 
higher-grade  stores  around  27. 

Freight  and  cartage  is  not  included  in  the  above  operating  expense 
percentages,  as  it  is  deducted  from  the  merchandise  statement.  Nor 
is  interest  included,  which  is  deducted  from  net  profit. 

Buying  expense  is  an  item  kept  by  scarcely  any  but  department 
stores,  and  with  them  it  is  seldom  a  true  buying  expense,  because  the 
buyer's  salary  or  commission  usually  includes  services  for  selling  or 
the  directing  of  selling  and  also  for  management. 

It  is  interesting  to  note,  however,  that  we  have  found  a  tendency 
for  estimates  of  time  devoted  to  buying  (which  includes  the  looking- 
over  of  stock  records  and  of  size-up  sheets  as  well  as  the  inspection  of 
samples)  to  center  about  certain  proportions  according  to  whether  in 
a  rough  way  the  yearly  sales  are  above  or  below  $50,000.  With  the 
proprietor's  or  manager's  salary  or  drawings  distributed  in  the  same 
proportion,  a  surprisingly  uniform  percentage  of  buying  expense 
results,  no  matter  what  the  sales  or  the  expense  may  be. 

This  percentage  ranges  from  0.8  to  1.8  of  the  net  sales.  The 
Bureau  has  percentages  ranging  from  0.3  to  3.1,  but  the  minimum 
does  not  comprehend  the  full  buying  expense  as  defined  above,  and 
the  maximum  is  for  department  stores  and  not  comparable  for  reasons 

'  Adapted  from  the  Bulletin  of  Ike  Bureau  of  Business  Research  of  Harvard 
University,  No.  i,  May,  1913,  This  bulletin  is  a  preliminary  report.  The  Bureau 
regards  the  findings  as  tentative  in  some  particulars. 

'  "Net  sales"  means  gross  sales  less  returns  made  by  customers  and  allowaoces 
made  to  them. 


VALUE  411 

already  noted.  The  figures  at  present  seem  to  center  about  i .  i  per 
cent,  with  a  marked  concentration  of  them  between  i .  o  per  cent  and 
1 . 3  per  cent.  Some  interesting  comparisons  could  be  made  with  some 
department-store  buying  expense  figures  in  their  shoe  departments. 

The  very  mention  of  the  item,  selling  expense,  is  almost  a  sufficient 
argument  for  the  necessity  of  a  uniform  accounting  system — so  many 
opinions  prevail  as  to  what  constitutes  selling  expense.  While  the 
boimdaries  between  buying,  selling,  and  management  are  not  clear  and 
distinct  but  shade  into  each  other,  the  main  elements  of  each  of  these 
can  be  distinguished  according  to  sound  theory  and  practice,  and  if 
those  nearer  the  line  have  to  be  divided  somewhat  more  arbitrarily, 
just  as  in  certain  railroad  accounting  items,  it  is  vastly  better  to  do 
so  when  the  advantages  of  accurate  comparison  are  considered. 

The  percentage  of  salaries  and  wages  of  the  sales  force  has  been 
encountered  ranging  from  5.0  to  10.3.  Percentages  as  low  as  4  and 
as  high  as  13  have  been  eliminated  because  of  doubt  of  their  being 
genuinely  comparable  and  because  of  insufficient  opportunity  to  verify 
their  accuracy.  There  appears  a  marked  concentration  of  the  figures 
between  7  per  cent  and  8  per  cent  in  cities  of  more  than  100,000 
population.  It  is  sufficient  indeed  to  point  to  a  standard  of  7  per 
cent.  It  may  be  possible  to  attain  6  per  cent  in  cities  of  this  size. 
The  Bureau  has  eleven  percentages  running  between  6  and  7  but  in 
the  light  of  its  present  knowledge  6  per  cent  would  be  very  thoroughly 
investigated  before  being  accepted. 

Advertising  with  its  definition  as  standardized  by  the  Bureau's 
system  has  been  found  ranging  from  o .  o  per  cent  to  8 . 8  per  cent,  with 
a  tendency  to  center  about  2 .  o  per  cent  with  the  greatest  concentra- 
tion between  i  per  cent  and  2  per  cent. 

Delivery  expense  has  been  found  to  date  ranging  from  practically 
o .  o  per  cent  on  the  lower-priced  stores  to  i .  4  per  cent  on  the  higher- 
priced  stores.  The  figures  of  the  stores  making  deliveries  center 
around  0.6  per  cent,  with  a  marked  concentration  between  0.4  per 
cent  and  o .  6  per  cent  of  the  net  sales. 

Rent  has  furnished  the  greatest  variation  of  all,  namely,  from  i .  8 
per  cent  to  14.6  per  cent  of  the  net  sales  in  going  concerns.  Despite 
this  rather  astonishing  range,  a  distinct  tendency  is  encountered  for  the 
figures  to  center  about  5  per  cent,  as  many  being  above  that  percent- 
age as  below,  with  three-fifths  of  them  all  falling  between  3  per  cent 
and  7  per  cent.  Between  3  per  cent  and  4  per  cent  alone,  however, 
there  is  sufficient  concentration  of  percentages  to  warrant  the  sugges- 


412  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

tion  of  not  only  5  per  cent  as  a  typical  figure,  but  3  per  cent  as  a  stand- 
ard to  be  aimed  for.  So  that,  for  example,  a  dealer  who  found  his  rent 
percentage  7  would  know  not  only  that  5  per  cent  was  a  more  normal 
figure  but  also  that  3  per  cent  was  by  no  means  an  unattainable  figure. 

On  rather  limited  data,  so  that  it  must  be  stated  tentatively,  it 
yet  begins  to  appear  as  if  the  rent  item  fell  off  markedly  in  importance 
in  towns  of  less  than  100,000  population. 

It  has  been  urged  upon  the  Bureau  from  weighty  sources  that  the 
rent  and  advertising  items  should  be  considered  together,  because  of 
the  advertising  element  involved  in  a  location  of  high  rental. 

This  seems  plausible,  and  the  Bureau  is  watching  for  any  apparent 
connection  between  the  advertising  and  rent  expense.  As  yet  no 
direct  relation  appears.  High  rent  percentages  with  low  advertising 
percentages  have  been  encountered,  but  in  no  marked  degree  more 
than  high  rent  percentages  with  high  advertising  percentages. 

Decidedly  the  general  practice  is  to  charge  interest  on  borrowed 
capital  only.  That  on  capital  invested  has  been  added  by  the  Bureau, 
and  since  the  sum  of  both  is  deducted  from  the  net  nominal  profit  to 
secure  the  final  net  profit,  it  is  not  treated  as  an  expense. 

The  interest  figures  thus  made  up  have  ranged  from  i .  o  per  cent 
to  7 . 9  per  cent  but  have  centered  around  2 . 5  per  cent  and  concen- 
trated between  2.0  per  cent  and  2.5  per  cent  of  the  net  sales. 

The  number  of  stock-turns  has  a  range  so  far  in  our  data  of  from 
I .  o  to  3 . 6  times.  It  seems  to  center  about  i .  8,  and  a  sufficient  num- 
ber have  stock-turns  of  2 . 5  to  warrant  accepting  that  as  a  realizable 
standard.  That  is,  a  shoe  store  has  been  encountered  whose  stock 
turned  over  no  more  than  once  in  a  year,  and  another  whose  stock 
turned  as  many  as  3 . 6  times.  The  majority,  however,  turned  their 
stock  more  than  i .  8  times,  but  less  than  2 .  o  times. 

It  is  probably  scarcely  necessary  to  call  attention  to  the  public 
importance  of  this  item  of  stock-turn.  Imagine  in  the  roughest  kind 
of  a  way  the  millions  of  capital  that  could  be  released  from  investment 
in  merchandise  should  the  retailer  increase  his  stock-turns  but  once. 
The  bearing  of  this,  furthermore,  upon  the  demand  for  higher  profit  per 
pair,  now  rather  prevalent,  may  also  be  seen.  More  stock-turns  mean 
an  increase  in  net  profit  without  any  raising  of  the  price  per  pair. 

The  annual  sales  of  the  average  salesperson  have  been  obtained 
by  dividing  the  annual  net  sales  of  a  concern  by  the  average  number 
of  regular  salespeople,  certain  rough  but  fairly  well-tested  equivalents 
being  adopted  for  the  extra  salespersons. 


VALUE 


413 


The  averages  encountered  to  date  range  from  sales  of  $5,000  per 
salesperson  per  year  to  $16,500,  centering  about  $10,000.  It  should 
be  remembered  that  our  data  are  still  preponderantly  from  the  large 
cities  and  very  likely  raise  this  central  average.  In  the  cities  under 
50,000  and  in  rural  communities  it  is  expected  to  run  considerably  less. 

The  number  of  salespersons  should  form  one  of  the  first  rough  tests 
of  the  efficiency  of  a  retail  shoe  concern,  and  in  the  large  cities  the 
above  figure  of  $10,000  annual  sales  per  average  salesperson  will  be 
found  not  far  wrong,  with  possibly  a  reduction  to  $8,000  for  suburban 

Summary  Table  of  Percentages  of  Given  Items  to  Net  Sales 


Item 


Gross    profit,    including 
discounts 

Total  operating  expense 
not    including    freight 
and  cartage  and  inter 
est 


Buying  expense. 

Sales  force 

Advertising .  .  .  . 

Deliveries 

Rent 

Interest 


Lowest 
Percentage 


20 


18 
0.8 

0.0 
0.0 
1.8 
1 .0 


Highest 
Percentage 


42 


35 

1.8 

10.3 

8.8 

1-4 
14.6 

7-9 


Percentage  about 

Which  Data  Center 

(Not  an  Average) 


Percentage  about 
Which  a  Concentra- 
tion is  SufScient  to 
Indicate  a  Reali- 
zable Standard 


f  Low  grade  23-25 
\High  grade  30-33 


Low  grade  23 
High  grade  27 

I.I 

8.0 

2.0 

0.6 

S-o 

2.5 


Low  grade  20 
High  grade  25 

i.o 

7.0 

1-5 

0.4 

30 
2.0 


Stock-turns 

Annual  sales  of  average 
salesperson 


stores.  Again  may  be  noted  the  same  variations  in  speed  of  marketing 
mentioned  under  stock-turns.  For  example,  the  salesperson  of  men's 
shoes  can  attain  a  higher  average  than  the  salesperson  of  women's 
shoes.    The  figures  as  given,  however,  are  for  stocks  as  a  whole. 

It  should  further  be  remembered  that  the  extremes  above  given 
are  in  themselves  averages  and  not  the  record  of  any  individual  sales- 
person. Certain  individual  sales  records  of  $30,000  and  above  have 
been  encountered,  but  no  averages  approaching  that. 

Where  rents  are  high  absolutely,  that  is  per  square  foot,  the  sales- 
person's average  also  rises,  as  would  be  expected,  indicating  the 


414  MATERIALS  FUR  ELEMENTARY  ECONOMICS 

advantageous  site  in  a  dense  traffic  zone.  For  example,  the  high 
average  of  $16,500  above  was  reached  on  one  of  the  following  great 
business  thoroughfares:  Broadway,  New  York;  Chestnut  Street, 
Philadelphia;  and  State  Street,  Chicago.  But  the  increased  volume 
of  sales  does  not  seem  to  keep  the  rent  expense  from  ranging  from  8 
per  cent  to  12  per  cent  in  some  of  these  cases. 

The  table  on  p.  413  condenses  the  essential  facts  of  the  foregoing 
paragraphs. 

112.     PRICES  TO  THE  SMALL  PURCHASER' 

The  poor  must  buy  everything  at  retail.  They  are,  therefore, 
greatly  handicapped  in  securing  full  value  for  their  money  in  their 
various  purchases  of  supplies.  "The  poor  housewife  knows  what  good 
bargains  are,  but  the  meagemess  of  her  purse  oftentimes  prevents  her 
from  purchasing  supplies  except  in  very  small  quantities.  She  goes 
to  the  grocery  store  and  buys  a  single  bar  of  soap  for  five  cents,  know- 
ing very  well  that  she  could  get  six  bars  for  a  quarter,  and  that  if  she 
should  buy  six  bars  she  would  save  five  cents;  but,  perhaps,  if  so  much 
is  spent  for  soap  there  will  not  be  enough  for  food.  She  is  buying 
potatoes  at  the  market.  For  her  large  family  a  bushel  of  potatoes 
would  not  be  an  oversupply  and  that  quantity  can  be  bought  for  a 
dollar;  but  the  outlay  of  a  dollar  for  potatoes  may  not  be  possible. 
Instead  of  spending  a  dollar  for  a  bushel  she  spends  eight  cents  for  a 
quarter  of  a  peck,  paying  at  the  rate  of  $1.28  a  bushel,  losing  nearly 
30  per  cent  by  the  transaction.  Three  cans  of  tomatoes  can  be  bought 
for  25  cents,  but  she  has  only  enough  money  for  one  can,  and  for  that 
she  pays  10  cents,  perceiving  clearly  as  she  does  that  for  every  five 
cans  purchased  in  this  way  there  is  a  clear  loss  of  one  can.  She  has 
gone  the  rounds  of  the  market  and  has  nearly  finished  her  purchases, 
but  there  are  still  butter,  sugar,  coflfee,  and  salt  to  be  bought,  and 
besides  some  matches  are  needed.  For  all  these  things  she  has  25 
cents  remaining.  Butter  is  30  cents  a  pound;  sugar,  5  cents;  coffee, 
15  cents;  salt,  5  cents  a  large  sack  or  3  cents  a  small  sack  (the  latter 
being  half  as  large  as  the  former);  matches  3  boxes  for  5  cents  .or 
2  cents  a  box.  The  purchase  of  a  pound  of  butter  cannot  be  thought 
of.  The  purchase  of  a  half  pound  would  leave  but  10  cents  for  sugar, 
coffee,  salt,  and  matches.  If  all  these  desired  articles  are  to  be 
bought,  the  remaining  25  cents  must  be  skilfully  spent.     Practice  has 

'  Adapted  from  F.  H.  Streightofif,  The  Standard  of  Living  among  the  Industrial 
People  of  America,  pp.  154-59.     Houghton  Mifl3in  Co.,  1911. 


VALUE  415 

taught  our  housewife  the  art  of  making  skilful  divisions.  She  buys 
a  quarter  of  a  pound  of  butter  for  8  cents,  a  half-pound  of  sugar  for 
3  cents,  half  a  pound  of  coffee  for  8  cents,  a  small  sack  of  salt  for  3 
cents,  a  box  of  matches  for  2  cents,  and  has  i  cent  left  with  which 
to  buy  an  onion  for  the  soup.  She  has  lost  heavily  on  every  one 
of  these  articles,  including  the  ^onion,  and  she  knows  she  has 
lost."* 

Besides  these  routine  losses,  the  poor  encounter  other  commercial 
disadvantages.  One  of  these  is  the  apparent  necessity  of  buying  on 
the  instalment  plan.  It  is  certainly  true  that  many  an  article  would 
never  be  purchased  at  all  were  it  not  for  this  system,  yet  the  buyer 
has  to  meet  enormous  overcharges  on  everything  thus  obtained.  "A 
dollar  or  more  is  lost  on  a  coarse  blanket,  two  or  three  dollars  on  an 
almost  worthless  nig,  twenty  or  thirty  dollars  on  a  sewing  machine." 
In  addition  to  the  financial  wastefulness  of  such  a  method  of  acquisi- 
tion, there  is  a  moral  evil.  To  be  always  in  debt  for  something  is  not 
wholesome,  neither  is  it  elevating  to  feel  that  one  does  not  own  all 
the  furniture  in  the  house,  and  that,  unless  payments  are  made 
promptly,  the  goods  will  be  forfeited  and  all  that  has  been  paid  for 
them  utterly  lost.  On  the  other  hand,  it  is  even  more  degrading  when 
the  housewife  yields  to  temptation,  and  so  discourages  the  collector 
that  he  gives  up  his  visits  before  the  full  sum  has  been  paid.  In 
spite  of  its  pemiciousness,  however,  instalment  buying  cannot  be 
absolutely  and  indiscriminately  condemned. 

The  very  poor  lose  heavily  in  all  their  transactions  involving 
money.  The  poor  man's  dollar  does  not  bring  him  so  much  as  the 
rich  man's  dollar,  although  it  is  very  much  harder  to  earn. 

113.    PACKAGE  GOODS' 

The  consumption  of  various  food  products  specially  prepared  and 
distributed  in  packages  of  various  sizes  has  increased  enormously 
during  the  last  decade.  While  these  packed  goods  are  vmdoubtedly 
wholesome,  convenient,  and  attractive,  they  nevertheless  as  a  rule 
cost  more  to  the  consumer  than  does  the  same  quantity  of  food  pur- 
chased in  bulk.  Indeed,  the  consumption  of  package  goods  under 
present  conditions  involves  a  large  amoimt  of  waste  in  the  expenditure 

'  S.  E.  Forman  in  the  Bulletin  of  the  United  States  Bureau  of  Labor,  No.  64. 
*  Adapted  from  the  Report  of  the  [Massachusetts]  Commission  on  the  Cost  of 
Living  (1910).  PP-  340-46. 


4l6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  income.  The  habit  makes  for  increasing  comfort,  pleasure,  and 
luxury  in  the  household,  but  it  adds  heavily  to  the  expense  of  living. 

The  practice  of  buying  package  goods,  instead  of  purchasing  the 
same  food  products  in  bulk,  involves  a  threefold  addition  to  cost: 
(i)  the  packages  are  frequently  short  in  weight,  and  the  purchaser 
often,  if  not  usually,  pays  higher  for  the  food  value  that  he  obtains 
than  if  he  bought  in  bulk;  (2)  he  has  to  pay  for  the  extra  cost  of 
fancy  packing  and  of  distribution  in  small  quantities;  (3)  as  most  of 
the  package  foods  are  heavily  advertised,  the  consumer  has  to  pay 
also  for  this  expense.  It  is  not  implied  here  that  the  consumption  of 
package  foods  should  be  discontinued  altogether,  and  the  old  method 
of  bulk  purchase  adopted  exclusively.  Consumers,  however,  should 
be  made  thoroughly  acquainted  with  the  fact  that  certain  abuses  have 
developed  in  connection  with  the  purchase  of  the  package  foods, 
which  reduce  the  amount  of  food  value  received  for  a  given  expendi- 
ture of  money 

It  appears,  for  example,  that  one  brand  of  oats  in  packages  costs 
7 .  57  cents  per  pound,  in  bulk  3 . 3  cents  per  pound;  bacon  in  glass  jars 
57.6  cents  per  poimd,  sliced  but  unpacked  35  cents  per  pound;  corn 
meal  in  packages  5.6  cents  per  pound,  in  bulk  2^  cents  per  pound; 
graham  crackers  in  packages  18  cents  per  pound,  in  bulk  15  cents  per 
pound;  cheese  biscuit  in  packages  30  cents  per  pound,  in  bulk  20 
cents  per  pound. 

....  In  defense  of  the  package  goods,  it  is  contended  that  this 
method  of  bringing  goods  to  the  consumer  is  more  convenient  and 
sanitary  than  the  method  of  bulk  sale.  The  package  keeps  out  the 
dust,  dirt,  and  germs  that  otherwise  would  get  into  the  food  through 
the  handling  by  dealers.  Undoubtedly,  the  package  method  has  a 
real  advantage  in  its  favor  in  the  matter  of  cleanliness  and  neatness. 
The  goods  are  usually  prepared,  also,  in  peculiarly  attractive  and 
appetizing  style.  The  small  grocery  is  often  not  notable  for  its 
sanitary  and  aesthetic  appointments,  and  goods  sold  there  under  the 
conditions  that  existed  in  connection  with  the  old  practice  of  bulk 
purchase  were  often  unwholesome  and  dangerous  to  public  health. 


VALUE 


417 


114.   VARIATIONS  IN  COST  OF  PRODUCTION  AMONG  DIFFER- 
ENT NEWS-PRINT  PAPER  ESTABLISHMENTS' 

The  38  mills  in  the  United  States  produced  940,478.  i  tons  of  paper 
in  the  schedule  period,  at  a  total  cost  of  $30,921,400.39,  or  an  average 
total  cost  of  production  of  $32.88  per  ton.  The  lowest  total  cost  in 
any  one  mill  was  $24.50;  the  highest,  $43.  The  range  in  cost  of 
ground-wood  pulp  per  ton  of  finished  paper  is  from  $8.26  to  $18.54, 
with  an  average  for  all  of  $13 .  27;  for  sulphite  pulp  the  range  is  from 
$6 .  45  as  the  lowest  to  $14 .  12  for  the  highest,  the  average  being  $8 .  63 ; 
for  all  materials  the  average  cost  was  $22. 74  per  ton  of  paper,  with  a 
range  of  from  $15.64  to  $29. 22.  The  average  cost  of  manufacturing 
labor  is  $3 .  27  per  ton  of  paper,  the  range  being  from  $2.19  to  $7 .  26. 

Cost  of  Production  of  News-Print  Paper  in  the  United  States,  by 
Classified  Rates  of  Cost  per  Ton 


Total  Cost  per  Ton 


News- print  paper: 

Under  $25 

$25  and  under  $30.  . . 
$30  and  under  $3  2 .  50 
$32 .  50  and  under  $35 
$35  and  under  $37 .  50 
$37-50  and  under  $40 
$40  or  over 

Total 


Number  of 
Establish- 
ments 


I 

4 
7 
7 
6 

13 
I 


38 


Tons 
Produced 


45.022.2 
170,319.8 
2x0,215.7 
205,992.3 
107,373-4 
194,604.3 
6,950.4 


940,478.1 


Per  Cent  of 
Total  Pro- 
duction 


4.8 
18. 1 
22.4 
21.9 
II. 4 
20.7 
•  7 


100. 


Average 

Cost  in 

Each  Group 


24  50 
26.18 
31.96 
34-07 
36.03 

38.31 
43.00 


32.88 


As  will  be  seen  from  the  classified  table  above,  the  plant  producing 
at  the  lowest  cost  of  $24.50  per  ton  produces  but  4.8  per  cent  of 
the  reported  tonnage;  only  one  plant  produces  at  the  highest  rate, 
and  its  production  is  but  seven-tenths  of  i  per  cent  of  the  reported 
tonnage.  Four  plants  produce  18. i  per  cent,  at  an  average  total 
cost  of  $26.18.  Seven  plants  produce  210,215.7  tons,  or  22.4  per 
cent  of  the  reported  tonnage,  at  an  average  cost  of  $31.96;  seven 
other  plants  produce  21.9  per  cent  of  the  total,  at  an  average  of 
$34.07  per  ton;  while  25  of  the  38  establishments  produce  78.6  per 
cent  of  the  reported  tonnage  below  $37.50;  while  12  establishments 
produce  194,604.3  tons,  or  20. 7  per  cent  of  the  tonnage,  at  an  average 
of  $38.31  per  ton. 

'  Adapted  from  the  Tariff  Board  Report  on  the  Pulp  and  News-Print  Paper 
Industry  (191 1),  p.  27. 


41 S  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  lowest  average  manufacturing-labor  cost  in  the  classified 
group  is  $2. 24,  and  9.9  per  cent  of  the  reported  tonnage  is  produced 
at  this  cost  for  manufacturing  labor;  31 .6  per  cent  is  produced  at  an 
average  of  S2.84  per  ton.  That  is  to  say,  41 .5  per  cent  of  the  total 
is  produced  at  considerably  less  than  the  average  of  the  whole,  while 
an  additional  24  per  cent  is  produced  at  an  average  of  S3 .  20,  which  is 
less  than  the  average  of  the  whole.  An  amount  equal  to  20.4  per 
cent  of  the  total  reported  tonnage  is  produced  at  an  average  cost  of 
manufacturing  labor  of  $3.65  per  ton;  11.  i  per  cent  at  an  average 
of  $4.22  per  ton. 

Taking  the  average  of  the  manufacturing-labor  cost  for  ground- 
wood  pulp  ($2.18)  and  for  sulphite  pulp  ($3.84),  and  considering 
that  paper  uses  80  per  cent  of  ground  wood  and  20  per  cent  of  sulphite, 
the  total  manufacturing-labor  cost  from  the  rough  wood  to  the 
finished  paper  would  be  $5 . 782  per  ton;  that  is  to  say,  80  per  cent  of 
$2 .  18  is  $1 .  744,  20  per  cent  of  $3 .  84  is  $0 .  768,  and  these  added  to  the 
$3 .  27  labor  cost  in  the  paper  itself  gives  a  cost  of  manufacturing  labor 
from  rough  wood  to  paper  of  $5 .  782  on  the  average. 

115.    JOINT  PRODUCT  PRICES:  BEEP 

The  cost  of  beef  is  determined  in  part  by  the  value  of  the  by- 
products. The  price  of  the  live  animal  is  reckoned  to  include  the 
material  for  by-products  as  well  as  the  beef,  and  the  value  of  the 
by-products  is  regarded  in  the  trade  as  a  credit  to  the  cost  account 
of  beef,  or  in  other  words,  a  minus  cost.  This  is  of  course  a  rather 
arbitrary  way  of  looking  at  the  by-products  account,  because  after 
all  by-products  are  joint  products,  and  the  situation  of  the  beef 
market  (the  prices  of  beef  and  the  number  of  beef  cattle  slaughtered) 
determine  in  a  considerable  measure  the  prices  of  the  by-products. 
The  value  of  the  latter,  though  small  in  comparison  with  the  value  of 
beef,  is  still  important  enough  to  considerably  affect  the  total  value. 
In  the  first  half  of  1903,  for  example,  it  is  calculated  for  a  large  con- 
cern in  Chicago  that  the  average  live  weight  was  1,165  pounds,  the 
average  dressed  weight  was  665  pounds,  the  average  live  price  was 
$4.56,  the  average  cost  on  dressed  weight  was  $7.99,  the  average 
net  value  of  hides  was  $6 ,  64  ,the  net  value  of  hides  per  hundredweight 
of  dressed  beef  was  $1,  the  net  value  of  butter  fat  was  $3 .  95,  the  value 
per  hundredweight  of  dressed  beef  was  59  cents,  the  net  value  of 

From  the  Report  of  the  Commissioner  of  Corporations  on  the  Beef  Industry 
(1905),  p.  164. 


VALUE  419 

other  by-products  was  $1 .  60,  and  the  value  of  other  by-products 
per  hundredweight  of  dressed  beef  was  24  cents.  The  total  value 
of  by-products  amounts  to  $12.19,  or  $1.83  per  hundredweight  of 
dressed  beef.  The  cost  of  killing,  shipping,  and  selling  was  $1,891 
(excluding  interest),  which  equals  28.4  cents  per  hundredweight. 
This  should  be  deducted  from  the  credit  coming  to  the  packer  on 
the  by-products  in  order  to  give  the  net  credit  he  receives  on  the 
cost  of  cattle  (reckoned  on  dressed  weight).  The  difference,  or  net 
credit,  is  therefore  $1.55  per  hundredweight.  These  statistics  show 
that  with  an  average  live  price  of  $4 .  56  the  cost  per  hundredweight 
of  dressed  beef  would  be  $7.99,  and  the  cost  of  making  and  selling 
the  beef  28.4  cents  in  addition,  but  that  there  is  a  credit  on  by- 
products amounting  to  $1.83.  Hence  the  cost  price  of  the  beef 
(excluding  interest  on  capital)  would  be  $6.44,  and  the  margin 
between  live  price  of  cattle  and  net  cost  of  dressed  beef  $1 .  88. 

116.    DIRECT  AND  INDIRECT  COSTS' 

The  principle  of  apportioning  the  indirect  costs  according  to 
ability  to  pay  is  not  peculiar  to  the  transportation  business.  It  can 
be  traced  through  numerous  other  industries.  A  very  good  analogy 
is  that  of  the  packing  business.  The  original  purpose  of  slaughtering 
houses  was  to  supply  meat.  The  margin  between  the  price  of  cattle 
and  the  price  of  meat  had  to  be  suflSciently  large  to  pay  for  the  cost 
of  killing  and  packing.  These  costs  included  two  items,  the  cost 
of  handling  each  particular  animal  plus  a  portion  of  the  "overhead." 
In  the  development  of  the  industry  it  was  found  that  refuse  matter 
could  be  manufactured  into  fertilizer,  which  in  the  market  would 
bring  a  price  somewhat  higher  than  the  added  cost  resulting  from  its 
production.  Even  though  each  unit  of  fertilizer  did  not  pay  as  much 
toward  overhead  charges  as  each  unit  of  meat  did,  no  injustice  was 
done  to  the  purchasers  of  meat.  On  the  contrary,  they  might  profit 
by  the  production  of  the  fertilizer,  because  the  total  overhead  expense 
to  be  distributed  upon  the  several  units  of  meat  was  reduced  by 
the  amount  contributed  by  the  fertilizer  department,  thereby  enabling 
the  packer  to  reduce  the  price  of  meat.  Likewise,  other  by-products 
came  to  be  manufactured  and  each  of  them  bore  a  part  of  the  indirect 
costs,  decreasing  the  amount  that  the  original  product  had  to  bear, 
and  thereby  aiding  in  its  production. 

'  From  J.  F.  Strombeck,  Freight  Classification,  pp.  21-24.  Houghton  Miffin 
Co.,  1912.  *• 


420  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

What  has  been  said  about  the  packing  business  holds  also  in  the  case 
of  the  petroleum  industry  and  many  others.  Whenever  a  by-product 
can  be  manufactured,  it  is  an  aid  to  the  industry  engaged  in  its  pro- 
duction if  it  contributes  even  a  little  to  the  meeting  of  indirect  costs. 

W.  M.  Acworth  brings  out  an  analogy  between  rail  transportation 
and  the  production  of  electricity  so  convincing  that  it  is  well  worth 
quoting  in  full.     "The  business  of  electric  supply  is  usually  a  mo- 
nopoly, and  in  this  country  [i.e.  England]  it  is  more  often  than  not 
in  public  hands,  yet  electric  undertakings  usually  make  charges  more 
widely  differential  than  an  ordinary  railway.     A  t^-pical  charge  is 
$d  per  unit  for  electricity  used  for  lighting  purposes;    id  per  unit  for 
electricity  used  for  power  purposes.     From  the  commercial  stand- 
point the  $d  for  lighting  is  fixed  as  the  maximum  which  competition 
and  other  illuminants  will  permit;  the  id  is  a  charge  made  to  induce 
users  of  steam  power,  gas-engines  and  the  like,  to  adopt  electricity  as 
a  substitute.     As  a  matter  of  equity  the  case  is  this:    The  electric 
undertaking  was  established  primarily  to  supply  light.     It  involves 
large  capital  cost  for  short-lived  machinery  and  mains.     Plant  and 
staff  must  be  capable  of  dealing  with  maximum  demand,  and  this 
demand — 'the  peak  of  the  load,'  as  it  is  commonly  called — only 
comes  for  about  two  hours  of  the  day,  and  that  during  the  winter 
months  of  the  year.     For  about  twenty  hours  out  of  the  twenty-foiu", 
the  bulk  of  the  plant  is  idle;  but  interest,  depreciation,  and  standing 
charges  are  running  on  all  the  time.     Such  service  cannot  but  be 
expensive  to  give.    There  is,  however,  a  way  to  make  it  less  expensive. 
If  consumers  can  be  induced  by  the  low  price  of  id  per  unit  to  take 
electricity  for  power,  they  will  use  it  in  the  daytime,  to  some  extent 
even  in  the  dead  of  night,  when  the  machinery  would  otherwise  be 
idle.     The  id — ex  hypothesi  the  highest  rate  the  trafl&c  will  bear — 
will  more  than  cover  the  extra  cost  of  fuel,  and  will  help  to  dilute  the 
general  expenses  of  the  undertaking.     So  far  from  the  low  differential 
rate  being  an  injury  to,  or  made  at  the  expense  of  the  consumers  of 
light,  the  contrary  is  the  case.    The  standing  charges — the  great 
bulk  of  the  whole — instead  of  being  charged  on,  say,  1,000,000  units, 
are  now  spread  over  6,000,000,  and  the  cost  of  supply  per  unit  is 
proportionally  decreased.    The  increase  of  the  low-charged  power 
customers  is  the  only  means  by  which  the  lighting  customers  can  hope 
to  see  the  charges  made  to  them  reduced." 

And  still  another  analogy  might  be  offered.     A  manufacturer  is 
selling  his  output  in  the  domestic  market  at  a  fixed  price,  which  nets 


VALUE  421 

him  a  fair  return  on  his  investment.  The  demands  of  the  home 
market  are  not  sufl5cient  to  enable  him  to  run  his  factory  at  more 
than  three-fourths  its  capacity.  He  finds  that  provided  he  reduces 
the  price  somewhat  he  can  secure  a  foreign  order  which  will  enable 
him  to  operate  his  plant  at  its  full  capacity.  This  reduced  price 
covers  all  the  direct  expenses  connected  with  filling  the  order  and 
leaves  a  small  margin  to  be  applied  to  the  indirect  costs  of  his  business. 
It  is  good  policy  for  him  to  accept  that  order.  This  is  exactly 
the  same  principle  on  which  carriers  give  low  rates  to  cheap 
commodities  to  encourage  their  movement.  A  low-value  commodity 
which  cannot  bear  the  regular  rate  is  to  the  carrier  in  exactly  the  same 
relation  as  the  foreign  order  is  to  the  manufacturer.  And  further,  no 
one  can  say  that  the  domestic  purchaser  pays  a  higher  price  on  his 
goods  so  that  the  foreign  order  may  be  filled  at  a  reduced  price.  The 
domestic  purchaser  does  not  only  not  bear  part  of  the  burden  of  the 
foreigner,  but  on  the  contrary  he  may  be  benefited  by  that  sale  in 
that  the  additional  earnings  will  enable  a  reduction  in  the  domestic 
price. 

117.    DIMINISHING  COST  OF  PRODUCTION' 

Edison  told  Mr.  Edmonds  a  very  interesting  personal  anecdote, 
especially  pertinent  at  this  time  when  the  accusation  is  made  that 
the  United  States  is  dumping  large  amounts  of  manufactured  pro- 
ducts on  the  foreign  market.     Edison  said: 

I  was  the  first  manufacturer  in  the  United  States  to  adopt  the  idea  of 
dumping  surplus  goods  upon  the  foreign  market.  Thirty  years  ago  my 
balance  sheet  showed  me  that  I  was  not  making  much  money.  My  manu- 
facturing plant  was  not  running  to  its  full  capacity.  I  couldn't  find  a 
market  for  my  products.  Then  1  suggested  that  we  undertake  to  run  our 
plant  on  full  capacity  and  sell  the  surplus  products  in  foreign  markets  at 
less  than  the  cost  of  production.  Every  one  of  my  associates  opposed  me. 
I  had  my  experts  figure  out  how  much  it  would  add  to  the  cost  of  operating 
the  plant  if  we  increased  this  production  25  per  cent.  The  figures  showed 
that  we  could  increase  the  production  25  per  cent  at  an  increased  cost  of 
only  about  2  per  cent.  On  this  basis  I  sent  a  man  to  Europe  who  sold 
lamps  there  at  a  price  less  than  the  cost  of  production  in  Europe.  By  doing 
this  I  was  able  to  employ  more  labor  to  run  my  plant  to  full  capacity,  and 
this  labor,  of  course,  received  high  wages.  American  consumers  were  not 
injured  in  the  slightest,  and  I  was  enabled  to  employ  25  per  cent  more  men 
and  get  rid  of  surplus  product  by  dumping  it  upon  the  foreign  market. 

'  From  the  Wall  Street  Journal,  December  20,  1911. 


422 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


ii8.    DIAGRAM  TO  ILLUSTRATE  DERIVED,  JOINT  AND  COM- 
POSITE DEMAND,  AND  JOINT  AND  COMPOSITE  SUPPLY 


OAK  UXS 


NAnJ 


MEAT 


FfiH 


rr^^ 


aALTnsH 


FURMTURE 


119.    THE  COMPLEXITY  OF  COMPETITIVE  PRICE-MAKING' 

The  following  paragraphs  present  in  the  briefest  possible  form  an 
analysis  of  competitive  disturbances  with  an  attempt  to  differentiate 
them  systematically  according  to,  first,  the  economic  situation  of  the 
competing  unit,  and,  second,  the  nature  of  the  product  about  which 
competition  centers.  For  brevity,  the  analysis  is  thrown  into  outline 
form. 

First,  Competition  insures  a  tendency  to  equal  rewards  as 
between  competing  units  at  a  level  not  permanently  below  that  of 
cost.  Each  competitor  is  concerned  with  the  relation  of  his  total 
receipts  to  his  total  outlay,  and  these  tend  to  be  equal.  Each  single, 
distinct  economic  process  tends  to  produce  value  equal  to  its  cost. 

Second.  This  requires  that  each  unit  of  the  product  should 
bring  in  enough  to  pay  the  cost  for  which  that  unit,  itself  and  indi- 
vidually, is  responsible.  Where  joint  cost  is  absent,  it  makes  no 
difference  whether  one  enterprise  produces  many  things  or  whether 
the  same  things  are  produced  each  by  a  separate  entrepreneur. 
Each  separate  economic  process  still  tends  to  earn  what  it  costs 
though  many  are  combined  under  one  management. 

Third.  Where  joint  cost  exists,  the  cost  of  an  undertaking  can 
no  longer  be  subdivided  in  this  simple  way.     The  whole  cost  is  no 

'  From  John  Maurice  Clark,  Standards  of  Reasonableness  in  Local  Freight 
Discriminations,  pp.  40-45.  Columbia  University  Studies  in  History,  Economics, 
and  Public  Law,  Vol.  XXXVII,  19 10. 


VALUE  423 

longer  represented  by  the  sum  of  the  special  costs.  If  items  of 
product  earn  only  their  individual  cost,  the  whole  business  is  run  at 
a  loss,  for  the  joint  costs  are  not  covered.  While  if  the  whole  cost 
is  covered,  the  outlays  on  joint  account  must  be  arbitrarily  allotted. 
The  latter  alternative  is  what  in  the  long  run  tends  to  happen.  Hence 
competition  does  not  control  the  ascribing  of  reward  to  various 
productive  agents  within  the  competing  unit. 

a)  A  business  carried  on  largely  at  joint  cost  is  a  business  of 
increasing  returns,  within  certain  limits.  If  the  plant  has  some 
capacity  unused,  it  is  easy  to  see  that  it  is  more  wasteful  than  if  there 
were  no  such  unused  capacity.  And  to  get  the  greatest  efficiency 
possible,  a  plant  must  be  big  enough  to  combine  the  productive  factors 
in  the  best  possible  proportions.  When  this  point  is  reached,  the 
business  ceases  to  be  one  of  "increasing  returns,"  and  the  resulting 
special  motive  to  expansion  ceases.  But  this  does  not  straighten 
out  the  bookkeeping  difficulties  caused  by  the  joint-cost  feature. 

b)  When  businesses  of  increasing  returns  compete  with  each 
other,  the  practice  arises  of  cutting  rates  to  attract  new  custom  while 
keeping  up  the  general  level  of  prices.  This  is  discrimination  between 
customers:  "dumping"  is  a  name  that  describes  it  rather  well.  If 
it  is  done  by  all  the  competitors  at  once  it  is  an  economic  waste, 
and  leads  to  "cut-throat"  competition.  This  forces  the  total  returns 
below  the  cost  level. 

c)  It  is  evident  that  such  a  condition  occurs  only  when  the 
capacity  of  the  existing  means  of  producing  goods  is  greater  than  is 
justified  by  the  demand.  This  cannot  happen  permanently,  however; 
the  low  level  of  cost  will  increase  the  demand  until  finally  we  reach 
the  limit  of  the  capacity  of  the  plants  to  expand  with  decreasing 
cost.  At  this  point  the  violent  underbidding  for  marginal  custom 
begins  to  diminish,  and  the  prices  tend  to  rise  as  the  demand  expands 
still  further.  This  rise  in  prices  is,  however,  in  most  cases  limited 
to  something  near  a  cost  level  by  potential  competition.  A  consider- 
able profit  might,  it  is  true,  be  retained;  for  men  do  not  usually 
build  big  new  plants  unless  those  already  in  the  business  are  earning 
extra  good  returns,  so  as  to  afford  them  a  decided  inducement  to 
enter  the  field.  But  if  the  earnings  of  the  plants  in  the  business 
become  very  large,  new  plants  will  be  built,  for  purposes  of  industrial 
blackmail  if  not  for  legitimate  competition. 

d)  While  the  condition  of  increasing  returns  lasts,  and  the  ten- 
dency to  cut-throat  competition  is  strong,  it  is  to  the  interest  of  all 


424  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

enterprises  to  prevent  it  in  any  way  possible.  Where  the  product 
in  question  is  fairly  homogeneous,  as  in  the  case  of  a  flour  mill  or  a 
woolen  mill,  the  extension  of  the  one-price  principle  forms  a  very 
good  means  of  drawing  the  line  between  fair  competition  and  that 
which  "spoils  the  market."  Under  this  principle,  each  unit  of  a 
homogeneous  product  is  charged  with  the  same  share  of  joint-cost 
outlays.  This  equal  prorating,  however,  does  not  stand  as  inherently 
logical  in  itself.  It  rests  rather  on  the  business  necessity  for  some 
such  limitation. 

e)  Where  the  product,  instead  of  being  homogeneous,  is  very 
heterogeneous,  any  such  simple  limitation  as  has  just  been  described 
is  bound  to  fail.  In  such  cases,  if  the  condition  of  increasing  returns 
lasts  any  length  of  time,  direct,  active  competition  becomes  distinctly 
uneconomical  and  the  chances  are  very  great  that  it  will  be  done 
away  with  entirely.  Potential  competition  will  then  be  the  only 
governor  of  prices.  This  to  a  considerable  extent  is  true  of  business 
conditions  today.  In  the  case  of  railroads  potential  competition  is 
not  very  efficient,  but  other  forces,  generalized  under  the  caption  of 
"market  competition"  are  claimed  to  have  the  same  effect. 

f)  But  it  is  only  direct  competition  that  can  regulate  the  prices 
of  all  the  single  articles  in  a  composite  product.  Even  when  the 
capacity  of  a  producer  is  fully  utilized  so  that  further  production 
would  not  fall  under  the  law  of  increasing  returns,  still  the  fact  of 
producing  at  joint  cost  would,  within  limits,  allow  considerable 
discretion  as  to  the  manner  of  sharing  the  existing  general  costs. 
Potential  competition  and  market  competition  in  its  more  general 
form,  if  not  in  all  cases,  leave  such  discretion  in  the  hands  of  the 
"competitor";  that  is,  tihese  forms  of  competition  fail  as  regulators 
of  prices  in  detail. 

We  have  now  in  effect  made  a  simple  classification  of  the  funda- 
mental phenomena  of  joint-cost  competition,  which  can  be  presented 
in  tabular  form. 

Can  we  pigeonhole  the  railroad  in  the  following  scheme  satisfac- 
torily? It  certainly  falls  in  the  two  divisions  that  deal  with  joint 
cost  and  increasing  returns.  But  to  argue  about  the  railroad,  and 
to  deal  with  it  merely  as  a  large  manufacturing  business  producing  a 
very  heterogeneous  product  under  conditions  of  joint  cost  and  of 
increasing  returns  unusually  long-continued — such  a  conception, 
while  allowing  for  many  of  the  peculiarities  of  railway  economics, 
is  still  inadequate.     There  are  still  further  departures  from  type 


VALUE 


425 


Competing  Unit 

Product  Homogeneous 

Products  Heterogeneous 

Producer  in  whose  process 
joint  cost  is  negligible. 

Each  unit  earns  its  own 
cost. 

Each  unit  earns  its  own 
cost. 

Producer  under  the  law  of 
joint  cost  and  increasing 
returns. 

Temptation  to  cut-throat 
competition  easily  re- 
strained by  the  senti- 
ment of  producers  and 
the  one-price  principle. 

Active  competition  runs 
almost  inevitably  into 
cut-throat  competition, 
bringing  general  price- 
level  below  cost.  This 
competition  tends  to 
destroy  itself. 

Producer  under  the  law  of 
joint   cost,  but  working 
near  maximum  efficiency 
so  that  increasing  returns 
are  no  longer  important. 

Temptation  to  cut-throat 
competition    removed. 
Joint    costs    naturally 
assigned  pro  rata,   as 
in  the  case  above. 

General  price-level  tends 
to  equal  that  of  cost. 
Joint-cost  items  im- 
puted to  units  of  pro- 
duct at  discretion  of 
entrepreneur. 

All   the  producers   in   the 
district  served  by  a  single 
railroad  system. 

General  level  of  railroads' 
charges  tends  to  be 
lower  than  monopoly 
price.  Discriminations 
between  different  ship- 
pers not  removed.  Be- 
yond this,  data  insuffi- 
cient for  simple  generali- 
zation. 

for  which  allowance  must  be  made,  and  which  have  yet  to  be  thor- 
oughly thrashed  out  in  the  field  of  economic  discussion  and  contro- 
versy. By  this  is  meant  the  "competition  of  markets"  principle 
as  applied  to  railways,  a  principle  which  is  certainly  different  in  its 
workings  from  typical  competition,  not  only  in  degree,  but  in  kind. 
This  term  is  applied  to  the  competition  of  two  or  more  roads  for  the 
privilege  of  carrying  to  a  common  market  goods  produced  on  their 
respective  lines,  a  kind  of  competition  in  which  the  railroad  and  the 
producer  co-operate. 

We  have  here  the  last  and  greatest  extension  in  competing  units 
which  we  must  add  to  our  scheme  of  variations  from  the  competitive 
type.  For  the  competition  which  governs  railway  rates  is  now  the 
competition  in  ultimately  marketing  the  goods  which  the  railroad 
carries.  In  this  the  roads  themselves  are  not  directly  involved,  and 
those  who  are  directly  involved  are  legion. 


426  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

1 20.     SELLING  BELOW  COST:  TOBACCO' 

The  Imperial  Tobacco  Company  immediately  began  a  campaign 
of  active  competition  to  check  and  frustrate  the  plans  of  the  American 
Tobacco  Company  for  strengthening  its  foothold  in  Great  Britain. 
In  March,  1902,  the  Imperial  offered  large  bonuses  to  customers  who 
would  undertake  not  to  sell  American  goods  for  a  term  of  years.  The 
American  Tobacco  Company,  through  the  Ogden's  Company,  met 
this  by  offering  to  its  British  customers,  for  the  next  four  years,  its 
whole  net  profits  on  British  business,  and  £200,000  a  year  besides. 
The  offer  was  as  follows: 

Commencing  April  2,  1902,  we  will  for  the  next  four  years  distribute 
to  such  of  our  cuslomers  in  the  United  Kingdom  as  purchase  direct  from  us 
our  entire  net  profits  on  the  goods  sold  by  us  in  the  United  Kingdom.  In 
addition  to  the  above,  we  will,  commencing  April  2,  1902,  for  the  next  four 
years,  distribute  to  such  of  our  customers  in  the  United  Kingdom  as  purchase 
direct  from  us  the  sum  of  £200,000  per  year.  The  distribution  of  net  profits 
will  be  made  as  soon  after  April  2,  1903,  and  annually  thereafter,  as  the 
accounts  can  be  audited,  and  will  be  in  proportion  to  the  purchases  made 
during  the  year.  The  distribution  as  to  the  £200,000  per  year  will  be  made 
every  three  months,  the  first  distribution  to  take  place  as  soon  after  July  2, 
1902,  as  accounts  can  be  audited,  and  will  be  in  proportion  to  the  purchases 
during  the  three-months  period.  To  participate  in  this  oiler  we  do  not 
ask  you  to  boycott  the  goods  of  any  other  manufacturer. 

This  offer  had  a  marked  effect  in  opening  the  British  trade  to 
American  competition.  As  a  counter  move  the  Imperial  Tobacco 
Company  threatened  to  invade  the  American  market,  and  in  the  sum- 
mer of  1902  it  was  reported  to  be  selecting  sites  for  factories  in  this 
country.  Before  any  definite  steps  were  taken,  however,  to  carry  out 
this  plan,  an  agreement  was  arrived  at  between  the  two  great  rival 
corporations  which  completely  changed  their  position  toward  each 
other. 

t 

121.     PRICE  POLICIES  OF  THE  DISTRIBUTER* 

The  producer  who  today  enters  the  market  to  manufacture  and 
sell  a  commodity  in  competition  with  other  producers  of  substantially 
identical  products  has  open  to  him  three  general  price  policies.     He 

'  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
Part  I  (1909),  p.  169. 

» Adapted  from  A.  W.  Shaw,  "Some  Problems  in  Market  Distribution," 
Quarterly  Journal  of  Economics,  XXVI,  712-17  (August,  1912). 


VALUE  427 

may  adopt  one  of  these  to  the  exclusion  of  the  others,  or  may  use  them 
in  combination. 

These  three  policies  may  be  termed,  (i)  selling  at  the  market 
minus;   (2)  selling  at  the  market;  and  (3)  selling  at  the  market  plus. 

1.  Selling  at  the  market  minus  is  that  policy  which  aims  to  increase 
sales  by  reducing  price.  The  distributer  who  markets  his  product  at 
a  price  range  below  that  established  for  the  identical  commodity  as 
sold  by  other  producers  not  only  attracts  consumers  from  other  dis- 
tributers, but  also  brings  into  the  market  as  consumers  certain  of  those 
whose  demand  was  before  unexpressed  because  the  price  level  estab- 
lished for  the  commodity  was  above  that  warranted  by  their  subjective 
valuation  on  the  commodity. 

This  policy  does  not  ordinarily  involve  a  differentiation  of  the 
product  from  the  stock  product  of  like  nature,  nor  the  use  of  trade 
marks,  brands,  or  trade  names.  The  producer  depends  upon  increased 
sales  to  give  a  reduced  proportion  of  overhead  expense  and  reduced 
costs  of  large  scale  production,  thus  increasing  his  area  of  profit.  The 
producer  appeals  to  the  consumer  mainly  through  the  difference  in 
price  l^vel. 

TH!s  policy  finds  illustration  in  the  selling  poUcy  of  most  depart- 
ment stores.  It  is  the  basis  of  bargain  counter  selling.  In  one  class 
of  department  store  it  becomes  the  dominant  policy.  Some  such 
stores  base  their  business  almost  entirely  on  selling  under  the  market, 
advertising  the  purchase  of  bankrupt  stocks  and  mill  clearances  as 
making  possible  such  price  cutting. 

And  in  nearly  all  department  stores  the  manager  will  at  times 
reduce  the  price  upon  a  staple  commodity  below  that  at  which  his 
competitors  are  willing  to  sell.  His  increased  sales,  arising  from 
custom  drawn  from  his  competitors  and  from  new  consumers  brought 
into  the  market,  decrease  the  proportion  of  overhead  expense  and 
enable  him  to  purchase  in  larger  quantities.  His  larger  purchases  put 
him  in  a  position  to  force  the  producer  to  share  with  him  the  economies 
of  large  scale  production.  Often,  indeed,  he  is  able  to  take  over  the 
entire  output  of  certain  factories. 

In  the  department  store,  moreover,  the  further  element  enters  that 
customers  attracted  to  purchase  a  staple  commodity  at  less  than  the 
prevailing  price  will  also  purchase  other  commodities  yielding  a  wider 
margin  of  profit. 

2.  Selling  at  the  market  has  been  the  policy  perhaps  most  charac- 
teristic of  our  scheme  of  distribution  during  the  period  when  the  stress 


428  MATERIALS  FOR  ELEiMENTARY  ECONOMICS 

was  on  production.     It  is  still  a  common  policy  in  the  marketing  of 
staple  goods. 

This  policy  consists  briefly  in  the  acceptance  of  the  market  price 
existing  for  the  commodity  as  a  fixed  condition.  The  producer  does 
not  seek  to  attract  purchasers  by  maintaining  a  price  level  somewhat 
lower  than  that  at  which  other  producers  of  the  same  commodity  are 
willing  to  sell,  nor  does  he  attempt  to  establish  his  commodity  upon  a 
new  and  higher  price  level  as  a  distinct  commodity.  He  recognizes 
the  market  price  for  such  a  commodity  as  something  objective,  and 
sells  his  commodity  at  the  established  level. 

The  acceptance  of  this  price  policy  leaves  open  to  the  merchant- 
producer  two  general  methods  of  increasing  his  area  of  profit.  He  may 
devote  himself  to  a  reduction  in  his  cost  of  production  by  a  better 
organization  of  his  plant,  or  he  may  seek  to  increase  his  sales,  thus 
giving  economies  of  large  scale  production  and  a  reduced  proportion 
of  overhead  expenses. 

Examples  of  the  adoption  of  this  policy  and  the  use  of  the  first 
method  of  increasing  profits  are  found  in  the  steel  industry.  The 
small  independent  manufacturer  often  accepts  the  market  price  of  a 
given  steel  product  as  a  fixed  condition,  sells  his  "  share  "  of  the  market, 
and  depends  upon  reducing  his  plant  costs  to  increase  his  profits. 

If  the  merchant-producer  adopts  this  second  method,  he  must,  in 
general,  differentiate  his  product  from  that  of  his  competitors  and 
build  up  a  demand  for  his  particular  product.  To  do  this  he  must 
depend  upon  the  same  means  that  would  be  used  to  establish  his 
product  as  a  distinct  commodity  upon  a  higher  price  level.  Trade 
marks,  brands,  and  trade  names,  coupled  with  niceties  of  finish,  even- 
ness in  the  quality,  or  more  convenient  packages,  serve  as  the  basis  for 
an  increased  demand  for  the  commodity  upon  the  same  price  level  as 
substantially  identical  products.  When  selling  at  the  market, 
superior  promptness  in  delivery  may  become  a  factor  of  great  impor- 
tance in  increasing  sales. 

A  recent  development  in  the  textile  industry  illustrates  the 
adoption  of  the  policy  of  selling  at  the  market,  combined  with  an 
attempt  to  increase  sales  at  the  market  price  by  a  differentiation  of 
the  product.  Apparently  the  textile  manufacturers  who  are  begin- 
ning to  brand  their  goods  do  not  seek  to  establish  a  new  price  level  for 
their  product  as  a  distinct  commodity,  but  rather  to  increase  their  sales 
by  building  up  a  demand  for  their  commodity  as  against  the  product 
of  other  manufacturers  at  the  prevailing  price  level. 


VALUE  4i9 

3.  Selling  at  the  market  plus  is  perhaps  the  most  characteristic  price 
policy  of  modern  distribution.  The  exceptionally  able  distributers 
have  in  recent  years  turned  more  and  more  to  this  policy.  They 
refuse  to  accept  as  a  fixed  condition  the  market  price  for  the  com- 
modities similar  to  those  which  they  produce.  They  isolate  their 
product,  and  establish  it,  practically  as  a  new  commodity,  on  a  differ- 
ent price  level. 

The  whole  basis  of  the  policy  is  the  differentiation  of  a  product 
from  other  goods  of  substantially  like  nature  by  improvements,  minor 
or  substantial,  and  the  identification  of  the  product  by  trade  marks, 
brands,  and  trade  names.  This  done,  the  producer  stimulates  a 
demand  for  his  product  by  calling  attention  to  stability  of  quality, 
niceties  of  finish,  improvements  in  package,  or  like  modifications.  He 
appeals  to  that  portion  of  the  consuming  public  whose  subjective 
valuation  upon  the  stock  commodity  has  left  them  a  so-called 
"consumer's  surplus"  over  the  market  price.  The  differentiated 
commodity  is  established  on  a  new  and  higher  price  level,  and  is,  to 
all  intents  and  purposes,  a  new  commodity. 

It  is  this  policy  that  forms  the  most  severe  test  of  the  ability  of  the 
distributer.  To  succeed  he  must  have  an  unusual  equipment,  includ- 
ing knowledge  of  human  nature,  of  the  psychological  organization  of 
the  individual  consumer,  and  must  be  able  to  give  proper  weight  to 
such  motives  as  social  emulation  and  all  the  varied  factors  that  enter 
into  the  subjective  ratio  of  exchange  of  the  consumer. 

122.   MONOPOLY  PRICE:    COFFEE  VALORIZATION^ 

Coffee-drinking  began  to  increase  apace,  especially  in  the  United 
States.  By  1890,  the  wholesale  price  of  coffee  was  more  than  17  cents 
a  pound,  and  still  only  a  little  more  than  half  the  world's  supply 
came  from  Brazil.  For  the  next  six  years  her  planters  enjoyed  an 
intoxicating  prosperity.  During  that  period  nearly  all  the  three 
million  inhabitants  of  the  state  of  Sao  Paulo  "entirely  gave  up  plant- 
ing corn,  rice,  beans,  everything  they  needed.  They  bought  them, 
because  coffee  was  so  immensely  profitable  that  they  put  all  their 
labor  in  coffee." 

It  takes  from  three  to  five  years  for  a  new  coffee  tree  to  come  into 
bearing,  but  by  1897  Sao  Paulo's  sudden  rush  into  the  field  began  to 

'  From  Robert  Sloss,  "Why  Coffee  Costs  Twice  as  Much,"  The  World's  Work, 
XXIV,  198-20S  (June,  igia) 


430  MATERLAXS  FOR  ELEMENTARY  ECONOMICS 

tell.  That  year  the  wholesale  price  of  coffee  was  only  a  trifle  above 
7  cejits  a  pound.  It  declined  year  by  year,  till  between  1901  and 
1903  it  hung  around  5  cents  a  pound.  Hard  times  for  the  planters 
set  in.  The  Sao  Paulo  government  declared  a  tax  on  any  new  coffee 
plantations,  hoping  to  drive  the  inhabitants  back  to  raising  com  and 
rice  and  beans,  but  it  was  a  vain  hope.  They  mortgaged  their 
plantations  and  went  right  on  raising  larger  coffee  crops  than  all  the 
rest  of  the  world  put  together.  Hard  times  grew  harder.  Mortgages 
began  to  be  foreclosed  right  and  left.  Plantations  were  falling  into 
foreign  hands.  The  Sao  Paulo  planters  were  in  ugly  mood,  and  they 
demanded  that  the  state  government  restore  prosperity.  There  was 
grave  danger  of  a  revolution.  In  the  face  of  it  the  government 
promised  that  it  would  itself  buy  up  a  large  proportion  of  the  next 
coffee  crop  at  a  price  above  the  market.  The  only  thing  lacking 
was  the  ready  cash.  So  the  government  appointed  a  special  com- 
missioner to  find  it. 

He  went  first  to  Paris,  to  the  Rothschilds,  who  had  been  the 
bankers  of  Brazil  for  sixty  years.  He  was  "flatly  and  at  once  re- 
fused." So  was  he  by  all  the  other  bankers  of  Europe.  Then  the 
Commissioner  bethought  him  of  the  coffee  merchants.  Who  of  them 
all  could  understand  conditions  in  Brazil  so  well  as  Hermann  Sielcken  ? 
— and  he  was  conveniently  resting  at  his  place  near  Baden  Baden. 
Thither  the  Commissioner  repaired  in  August,  1906,  and  explained 
the  situation. 

"Well,  what  do  you  want  us  to  do  ?"  asked  Hermann  Sielcken. 

"  We  want  you  to  finance  for  us  five  to  eight  million  bags  of  coffee," 
said  the  Commissioner,  blandly. 

Here  was  an  adventure.  Here  was  a  proposition  to  lift  bodily 
out  of  the  market  half  as  much  coffee  as  the  world's  total  production 
had  averaged  for  the  ten  preceding  years  when  prices  had  been  so 
low.  Presumably,  if  this  were  done,  prices  would  be  doubled.  But 
Hermann  Sielcken  shook  his  head. 

"No,"  he  said,  "there  is  not  the  slightest  chance  for  it,  not  the 
slightest."  And  he  pointed  out  that  there  would  be  "no  financial 
assistance  coming  from  any  where"  if  the  Sao  Paulo  planters  kept  on 
raising  such  ridiculously  large  crops  of  coffee. 

The  Commissioner  assured  him  that  the  prospect  was  for  smaller 
crops  in  future.    Hermann  Sielcken  was  not  so  sure  about  it. 

"At  a  price  low  enough — ,"  he  mused.  "I  might  be  able  to  raise 
funds  to  pay  80  per  cent  on  a  value  of  7  cents  a  pound." 


VALUE  431 

The  Commissioner  was  dismayed.  His  government  had  already 
promised  to  take  coffee  from  the  planters  at  about  a  cent  a  pound 
above  the  market,  and  the  market  then  stood  at  nearly  8  cents.  The 
government  would  have  to  dig  to  make  up  the  difference.  Hermann 
Sielcken's  terms  were  the  best  that  could  be  got,  however,  and  the 
Commissioner  accepted  them. 

Thus  was  launched  the  famous  "Valorization  Coffee  Plan." 
From  that  time  forth  Hermann  Sielcken's  part  in  it  became  "a  very 
active  one."  He  approached  a  few  large  coffee  merchants.  Arbuckle 
Bros.,  his  former  business  rivals,  were  the  first  to  join  him  in  this  new 
kind  of  speculation.  Two  or  three  other  firms  followed.  "We  are 
going  to  finance  it  downward,"  Hermann  Sielcken  told  them.  He 
explained  that  if  the  BraziHans  knew  they  could  get  enough  money 
to  buy  six  or  eight  million  bags  of  coffee  there  would  be  no  holding 
them,  and  that  the  merchants  would  simply  be  lending  money  to 
have  the  market  put  up  suddenly  on  themselves. 

So  Hermann  Sielcken  drew  up  a  contract.  In  it  the  merchants 
agreed  to  advance  80  per  cent  of  the  sum  required  to  buy  two  million 
bags  of  coffee  at  7  cents  a  pound.  If  the  market  went  above  7  cents 
the  government  was  to  make  no  purchases.  If  it  fell  below  7  cents  the 
government  was  to  make  good  the  difference  to  the  merchants  by 
cable.  The  government  further  agreed  not  to  buy  in  any  event  more 
than  500,000  bags  of  coffee  per  month  from  October  i,  1906,  to 
February  i,  1907,  the  principal  crop  season. 

Before  that  season  was  well  advanced  the  unexpected  was  happen- 
ing. The  Brazilians  were  harvesting  the  biggest  coffee  crop  in  the 
world's  history.  The  market  quickly  dropped  below  7  cents  and 
went  on  falling.  By  the  end  of  January,  1907,  the  Sao  Paulo  govern- 
ment had  purchased  the  2,000,000  bags  of  coffee.  But  that  was  only 
a  drop  in  the  bucket,  and  the  government  was  clamoring  for  more 
money  with  which  to  stem  the  tide. 

Hermann  Sielcken  and  the  merchants  with  him  saw  the  wisdom 
of  that.  If  the  tide  were  not  stemmed,  it  would  spread  abroad  in 
the  world  so  much  coffee  that  the  two  million  bags,  the  security  of  the 
merchants,  would  be  worthless.  Hermann  Sielcken  became  very 
active,  and  "all  over  France  and  Germany  and  Belgium  brought  in 
every  one  who  could  help  carry  the  load."  And  in  little  more  than  a 
year  since  he  had  told  the  Commissioner  at  Baden  Baden  that  there 
was  "not  the  slightest  chance  for  it,"  Hermann  Sielcken,  with  the  aid 
of  some  forty  merchants,  had  financed  for  Sao  Paulo  the  pvirchase  of 
8. ^i; 7, 500  bags  of  coffee. 


i 


432  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

But  Sao  Paulo  wasn't  satisfied.  During  this  first  year  of  "Valori- 
zation," the  Brazilian  coffee  crop  had  run  to  almost  20  million  bags. 
Those  planters  who  had  been  able  to  sell  to  the  government  had 
received  about  a  cent  a  pound  above  the  market,  but  they  had  been 
obliged  to  pay  half  of  that  back  in  the  form  of  an  export  tax  on  coflfee 
to  enable  the  government  to  carry  its  loans.  Toward  the  end  of 
1907,  although  Sao  Paulo  had  lifted  half  the  world's  visible  supply  of 
cofifee,  the  market  stood  only  a  trifle  above  6  cents  a  pound.  That 
was  not  at  all  the  Brazilian  planter's  idea  of  prosperity. 

Things  grew  no  better  during  igo8.  Although  the  next  coflfee  crop 
turned  out  much  smaller,  the  world's  supply  was  still  so  far  in  excess 
of  the  demand  that  the  market  remained  down.  The  Sao  Paulo 
planters  continued  grumbhngly  to  pay  the  export  tax,  but  that  all 
went  as  interest  to  the  merchants.  The  government  of  Sao  Paulo 
had  spent  not  only  the  merchants'  money  but  also  all  its  own  funds 
on  valorization,  and  was  rapidly  going  bankrupt.  In  desperation 
it  sold,  sub  rosa,  1,300,000  bags  of  the  coflfee  that  was  the  merchants' 
security. 

The  merchants  began  to  have  misgivings.  There  was  not  the 
slightest  prospect  of  Sao  Paulo's  being  able  to  pay  oflf  their  loans.  If  it 
came  to  throwing  the  purchased  coflfee  on  the  low  market,  their  securi- 
ties would  go  for  a  mere  song.  Where  was  the  profitable  speculation 
into  which  Hermann  Sielcken  had  led  them  ?  They  made  it  plain  that 
they  didn't  want  to  help  carry  the  loan  any  longer.  There  were  signs 
of  mutiny  aboard  the  good  ship  "Valorization"  in  igo8. 

It  was  a  year  of  especial  activity  for  Hermann  Sielcken.  He  went 
straight  to  the  Rothschilds  and  proved  to  them  what  a  profitable 
speculation  it  would  be  if  only  they  and  a  few  big  bankers  would  take 
the  places  of  the  merchants  in  the  Valorization  Coflfee  Plan.  He 
pointed  out  that  there  still  remained  more  than  7  million  bags  of 
coflfee  as  security  after  the  surreptitious  sales  of  the  Sao  Paulo  govern- 
ment. Valued  at  6^  cents  a  pound,  the  market  price  at  that  time,  it 
would  more  than  pay  oflf  the  loans  which  stood  against  it.  None  of 
the  merchants  had  advanced  more  then  five  and  six-tenths  cents  a 
pound  on  it,  most  of  them  much  less;  on  a  great  deal  of  it  only  4  cents 
a  pound  had  been  advanced.  Of  course,  the  coflfee  would  not  bring 
6^  cents  if  thrown  on  the  market  now.  But  if  it  could  be  held,  it 
could  be  gradually  and  profitably  disposed  of  during  a  period  of,  say, 
ten  years — especially  if  something  could  really  be  done  meanwhile  to 
help  the  price  of  coflfee. 


VALUE  433 

The  Rothschilds  had  some  suggestions;  they  knew  Brazil.  They 
replied  that  such  a  loan  could  not  be  considered  unless  the  cofEee 
as  security  for  it  be  shipped  from  Brazil  and  placed  in  the  hands  of 
bankers  for  safekeeping  and  subsequent  disposal. 

That  would  involve  carrying  charges,  costs  of  management,  etc. 
Then  there  would  be  nearly  $4,000,000  in  interest  to  pay  the  first 
year.  The  present  export  tax  on  coffee  in  Sao  Paulo,  less  than  one- 
half  a  cent  a  pound,  was  too  low.     Sao  Paulo  must  about  double  it. 

But,  Hermann  Sielcken  pointed  out,  taxes  are  just  what  the 
planters  were  objecting  to  down  there. 

Then,  the  Rothschilds  felt,  they  must  be  taught  how  to  get  rid 
of  taxes.  They  are  growing  at  present  85  per  cent  of  the  world's 
coffee.  If,  instead  of  constantly  offering  more  coffee  than  was 
wanted,  they  saw  to  it  that  the  world  got  somewhat  less  than  it 
needed,  other  nations  would  pay  all  the  taxes  on  coffee.  The  federal 
government  of  Brazil  should  interest  itself  in  this  matter.  It  collected 
a  tax  on  coffee,  called  the  pouta,  9  per  cent  of  the  market  price  in 
Brazilian  ports.  By  doing  something  to  help  the  price  of  coffee, 
Brazil  would  relieve  her  citizens  of  that  burden  and  increase  her 
own  revenues  at  the  same  time.  Let  her  pass  a  national  law  imposing 
a  heavy  penalty  on  anyone  that  planted  a  new  coffee  tree  in  Brazil,  and 
let  it  be  made  effective  by  the  appointment  of  federal  inspectors  to 
go  strictly  about  the  country  and  tear  up  any  new  trees.  The  result 
would  take  a  little  time,  of  course.  But  meanwhile  Sao  Paulo  could 
do  something  at  once  to  help  the  price  of  coffee.  The  state  govern- 
ment could  guarantee  that  not  more  than  9  million  bags  of  her  next 
coffee  crop  should  be  exported,  nor  more  than  10  million  of  any 
succeeding  crop. 

Mr.  Sielcken  thought  that  these  conditions  would  be  agreed  to, 
because  the  government  was  in  such  a  bad  way  down  in  Brazil  that 
they  would  do  almost  anything. 

Well,  then,  if  Sao  Paulo  would  issue  bonds,  and  if  the  federal 
government  of  Brazil  would  guarantee  them,  the  Rothschilds  would 
take  a  portion,  provided  other  bankers  would  take  the  rest. 

Hermann  Sielcken  hurried  around  to  other  bankers.  In  December, 
1908,  everything  was  settled.  The  Sao  Paulo  government  got  $75,- 
000,000,  promptly  paid  off  the  original  loans  of  the  merchants,  and  had 
a  tidy  little  sum  left  to  go  on  with. 

So  the  coffee  merchants  were  eliminated  from  valorization — all  but 
Hermann  Sielcken.     When  the  six  bankers  closed  the  deal,  they  each 


434  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

appointed  a  representative,  who,  with  one  from  the  SSo  Paulo  govern- 
ment, comprised  a  committee  charged  with  the  future  management  of 
the  affair.  On  this  committee  the  only  American  was  Hermann 
Sielcken,  representing  the  American  underwriters  of  the  loan,  a  minor 
interest  of  but  $10,000,000. 

Thus  completely  refitted,  "Valorization"  put  to  sea  again  to 
sail  in  shoal  waters  no  more.  And  Hermann  Sielcken's  part  in  it 
remained  a  very  active  function  on  the  Bankers'  Committee.  The 
future  of  valorization  depended  upon  being  able  to  dispose  favorably 
of  the  valorization  coffee.  Such  of  it  as  might  be  allotted  to  America 
was  to  be  disposed  of  under  the  sole  management  of  Hermann  Sielcken. 
America  drinks  more  than  half  of  the  world's  coffee.  The  price  of  a 
commodity  is  fixed  by  the  world's  best  market  for  it,  and  the  price 
of  coffee  in  Havre,  Hamburg,  London,  and  even  in  Brazil  follows 
closely  the  price  on  the  New  York  Exchange.  To  offer  any  consider- 
able quantity  of  coffee  on  that  exchange  would  naturally  cause  the 
market  to  break  all  over  the  world,  and  that  would  be  bad  for  valoriza- 
tion.   Hermann  Sielcken's  task  was  a  delicate  one. 

No  sooner  had  the  Bankers'  Committee  taken  hold  of  valorization 
than  the  price  of  coffee  on  the  New  York  Exchange  began  to  go  up. 
It  was  6|  cents  all  through  December,  1908,  when  the  deal  was  closed. 
By  the  middle  of  January,  1909,  it  had  jumped  to  7  cents;  by  the  end 
of  February  it  was  8  cents — although  a  larger  crop  than  the  preceding 
year  was  being  harvested  down  in  Brazil.  Sao  Paulo  was  worried 
about  restricting  exports,  and  proposed  instead  that  she  should  make 
assurance  sure  by  collecting  a  tenth  of  her  coffee  crop  every  year 
and  dumping  it  into  the  sea.  This  the  Bankers'  Committee  solemnly 
approved.  A  similar  intention  on  the  part  of  the  Dutch  long  ago  had 
been  branded  by  Adam  Smith  in  his  Wealth  of  Nations  as  "  a  savage 
policy."  The  press  of  the  world  so  branded  this,  and  it  was  abandoned. 
Nevertheless,  the  price  of  coffee  on  the  New  York  Coffee  Exchange 
ruled  higher  for  1909  and  the  Bankers'  Committee  offered  for  sale 
500,000  bags  of  valorization  coffee,  half  of  which  was  sold  by  Hermann 
Sielcken  in  New  York. 

The  year  19 10  opened  in  the  midst  of  a  season  when  a  still  larger 
coffee  crop  was  being  harvested  in  Brazil,  and  yet  the  market  on  the 
New  York  Coffee  Exchange  stood  at  8f  cents.  Again  the  annual 
sale  of  the  Bankers'  Committee  was  announced,  600,000  bags,  half  of 
which  were  disposed  of  in  New  York  by  Hermann  Sielcken.    Then 


VALUE  435 

in  the  middle  of  May  he  sailed  for  Europe  and  repaired  to  his  country 
estate  at  Baden  Baden. 

He  was  no  more  than  comfortably  settled  there  than  the  price  of 
coffee  on  the  New  York  Coffee  Exchange  began  to  jump  up,  till  on 
the  last  day  of  1910  it  stood  at  13^  cents.  It  had  stood  at  6^  cents  in 
December,  1908,  when  the  bankers  agreed  to  come  into  valorization. 
Here  was  a  rise  of  more  than  100  per  cent  in  two  years — a  rise  of  60 
per  cent  in  six  months. 

During   those   six  months,   Hermann   Sielcken,   though  at  his 

country  seat  in  Germany,  was  active.     Early  in   191 1,  when  the 

coffee  market  stood  well  above  13  cents,  Hermann  Sielcken  made  a 

flying  trip  to  attend  the  meeting  of  the  Bankers'  Committee  in 

Paris.    There  it  was  decided  that  they  would  sell  double  the  usual 

quantity  of  coffee  that  year,  1,200,000  bags.     Word  came  by  cable 

that  600,000  bags  had  been  sold  by  Hermann  Sielcken  in  New  York. 

We  have  his  own  word  for  it  that  those  sales  of  191 1  cleaned  up 

$25,000,000,  "or  one-third  of  the  loan  from  less  than  one-sixth  of  the 

coffee." 

The  good   ship  "Valorization"  will  make  port  in  1912.      She 

was  chartered  in  1908  for  a  cruise  of  ten  years.  She  has  accomphshed 
it  in  little  more  than  three.  In  that  time  she  has  picked  up  not  only 
all  of  the  $75,000,000  advanced  by  the  bankers,  but  about  $10,000,000 
or  more  necessary  to  retire  the  Sao  Paulo  bonds  at  par;  also  another 
odd  $10,000,000  to  pay  interest  on  the  bonds;  also  all  carrying 
charges  on  the  purchased  coffee  and  all  salaries  and  expenses  of  man- 
agement by  the  Bankers'  Committee.  In  this  brief  adventure 
valorization  has  quietly  gathered  from  the  American  breakfast 
table  half  the  export  tax  on  coffee,  imposed  in  Brazil  to  make  possible 
a  loan  the  purpose  of  which  was  to  put  up  the  price  of  coffee  on  the 
world.  From  the  same  American  breakfast  table  valorization  has 
gathered  half  the  pouta,  the  federal  tax  on  coffee  in  Brazil,  from  which 
the  government  buys  battleships  and  pays  for  campaigns  in  tea- 
drinking  countries — especially  England — to  increase  the  use  of  coffee, 
while  in  Brazil  everything  is  being  done  to  decrease  production  and 
exports. 

To  the  Brazilian  planter,  valorization  brings,  at  present  market 
prices,  a  profit  of  nearly  200  per  cent  on  his  coffee  crop,  over  and  above 
all  costs  of  production,  taxes,  exchange,  and  transportation  from  the 
interior  of  Brazil  to  the  coffee  ports  of  the  world. 


436  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Above  all,  "Valorization"  has  now,  safely  stowed  away  between 
decks,  4  400,000  bags  of  coffee,  which,  if  the  present  market  is  main- 
tained, and  the  stock  is  carefully  sold  away  from  the  exchanges,  is 
worth,  to  be  exact,  14^  cents  a  pound.' 

123.     DISCRIMINATING  PRICES:  OIL' 

The  prices  charged  by  the  Standard  Oil  Company  for  petroleum 
products  in  the  United  States  differ  widely  in  different  places  according 
to  the  degree  of  competition  or  monopoly.  This  is  true  of  all  classes 
of  petroleum  products,  but  is  most  conspicuous  and  most  easily  demon- 
strated with  respect  to  illuminating  oil  and  gasoline.  After  deducting 
freight  rates,  which  often  constitute  a  large  element  in  gross  prices, 
extraordinary  differences  in  prices  appear  (i)  as  among  different  states 
or  sections  of  the  country  and  (2)  as  among  towns  in  the  same  general 
vicinity — for  example,  within  the  borders  of  a  single  state.  These 
differences  in  price  are  to  some  extent  due  to  differences  in  the  cost  of 
producing  the  oil  and  gasoline  sold  in  different  sections  and  in  part  to 
differences  in  the  cost  of  marketing.  In  many  cases,  however,  they 
are  due  solely  to  differences  in  the  degree  of  competition,  and  in  other 
cases  a  large  part  of  the  difference  in  price  is  due  to  difference  in  the 
degree  of  competition. 

CONDITIONS   MAKING   PRICE   DISCRIMINATION   POSSIBLE 

The  methods  of  marketing  oil  products  lend  themselves  to  this 
practice  of  price  discrimination.  Illuminating  oil  and  gasoline — and 
the  same  is  in  less  measure  true  of  other  petroleum  products — are  not 
to  any  large  extent  sold  at  central  markets  or  through  jobbing  con- 
cerns independent  of  the  refiner.  The  Standard  Oil  Company  sells 
most  of  its  illuminating  oil  and  gasoline  in  the  United  States  directly 
to  retail  dealers  at  their  own  towns.  They  are  largely  delivered  to 
retail  dealers  at  their  own  stores  by  means  of  tank  wagons.     Conse- 

'  [In  191 2  the  United  States  government  started  a  suit  against  those  in  this 
country  who  had  entered  into  the  coSee  valorization  plan  on  the  ground  that  they 
were  operating  contrary  to  law.  The  suit  threatened  to  involve  the  government 
in  complications  with  Brazil,  and  eventually  a  compromise  was  agreed  upon 
whereby  the  suit  was  to  be  withdrawn  provided  the  coffee  held  in  this  country 
under  the  valorization  plan  was  sold.  In  the  spring  of  1913  the  government  having 
been  assured  that  the  coffee  had  been  sold  withdrew  the  suit.  Since  that  time  the 
price  of  coffee  has  fallen  to  about  9  cents  a  pound  (August,  19 13). — Editors.] 

•  From  the  Report  of  the  Commissioner  of  Corporations  on  the  Petroleum  Industry, 
Part  II  (1007),  pp.  27-36. 


VALUE  437 

quently  the  prices  of  oil  and  gasoline  are  in  general  purely  local  prices. 
The  retail  dealer  is  ordinarily  not  familiar  with  prices  charged  in  other 
towns  or  in  central  markets,  but  even  if  he  were  he  could  not  take 
advantage  of  lower  prices  prevailing  elsewhere  to  buy  oil  there  and 
bring  it  into  his  own  town.  The  cost  of  transporting  oil  in  barrels, 
particularly  in  less  than  carload  lots,  is  higher  than  in  tank  cars. 
Moreover,  tank-wagon  delivery  is  so  much  more  convenient  than 
barrel  delivery  that  the  retail  dealer  is  ordinarily  unwilling  to  buy 
barrel  oil  even  at  a  lower  price. 

The  Standard  Oil  Company  has  established  the  system  of  tank- 
wagon  delivery  in  the  larger  towns  in  all  parts  of  the  United  States 
and  in  a  large  proportion  of  the  smaller  towns  in  the  more  populous 
sections.  The  business  of  its  competitors  is  largely  confined  to  a 
limited  area  and  to  a  limited  number  of  towns  within  that  area.  In 
towns  and  sections  where  there  is  no  competition  the  Standard  can 
charge  monopoly  prices,  and  by  reason  of  the  high  prices  thus  obtained 
it  can  afford  to  reduce  prices  in  competitive  areas  and  towns  to  a 
point  which  leaves  no  profit  for  the  independent  concern. 

Perhaps  the  most  striking  instance  of  sectional  discrimination 
which  has  appeared  during  recent  years  is  on  the  Pacific  coast.  In 
southern  California  there  are  a  number  of  independent  refineries. 
The  Standard  carries  oil  from  its  great  refinery  near  San  Francisco, 
several  hundred  miles  by  water  and  rail,  and  sells  it  in  southern 
California  for  much  less  than  the  price  at  San  Francisco.  The 
average  price,  freight  deducted,  for  the  southern  part  of  California 
in  December,  1904,  was  7.2  cents  per  gallon,  while  for  the  northern 
part  of  the  state  it  averaged  12.4  cents  per  gallon.  In  Oregon, 
supplied  from  the  same  source,  the  price  averaged  15.3  cents  per 
gallon,  and  in  Washington,  15.7  cents.  The  price  in  Washington 
and  Oregon  was  thus  more  than  twice  as  high  as  in  Southern  California 
for  the  same  oil. 

These  differences  in  price  among  the  several  states  and  parts  of 
states  within  the  territory  supplied  from  a  single  source  much  exceed 
the  possible  differences  in  marketing  cost. 

Evidence  that  differences  in  price  are  due  to  discrimination  and 
not  merely  to  differences  in  cost  is  found  in  the  records  of  the  Waters 
Pierce  Oil  Company,  which  show  both  the  prices  in  individual  towns 
and  the  margin  of  profit  above  delivered  cost.  For  example,  in  the 
East  Texas  and  Louisiana  division  of  the  Waters  Pierce  Company,  in 
August,  1903,  the  margin  between  cost  and  selling  price  on  Brilliant 


438  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

oil  from  tank  wagon  ranged  from  1.92  cents  to  5.59  cents.  In 
August,  1904,  the  margin  of  profit  ranged  from  0.69  cents  to  5.05 
cents.  The  price  charged  by  the  Waters  Pierce  Oil  Company  for 
prime- white  oil  in  iron  barrels  in  Belleville,  III.,  in  April,  1904,  was 
so  low,  on  account  of  active  competition,  as  to  cause  a  loss  to  the 
company  of  o.i  cent  per  gallon,  while  in  numerous  other  towns  in 
the  same  division  of  the  company's  territory  (Missouri  division) 
there  was  a  margin  of  profit  of  from  4  to  5  cents  per  gallon. 

124.    THE  BURDEN  OF  ADVERTISING  COSTS* 

I.      THE   ACTUAL   OUTLAY 

An  editorial  in  Printer's  Ink  for  May  4,  191 1,  p.  78,  gives  the 
following  estimate  of  advertising  outlay  in  the  United  States  through 
some  of  the  chief  mediums  in  general  use: 

Newspaper  advertising  (retail  and  general) $250,000,000 

Direct  mail  advertising  (circulars,  form  letters,  etc.) 100,000,000 

Magazine  advertising 60,000,000 

Farm  and  mail  order 75,000,000 

Novelty 30,000,000 

Billposting 30,000,000 

Outdoor — electric  signs,  etc 25,000,000 

Demonstration  and  sampling 18,000,000 

Street  car  advertising 10,000,000 

House,  organs,  etc 7,000,000 

Distributing 6,000,000 

Theater  programmes,  curtain  and  miscellaneous 5,000,000 

$616,000,000 

n.      THE   XNCTOENCE   OF   THE   COST 

The  question,  "Who  pays  for  advertising  ?  "  is  often  discussed  and 
seldom  with  any  profit.  The  fruitlessness  of  these  discussions  is  more 
often  due  to  lack  of  a  clear  statement  of  the  problem  than  to  any  other 
single  cause.  Before  any  such  discussion  has  gone  far  it  often  becomes 
clear  that  neither  the  term  "pays"  nor  the  term  "advertising"  repre- 
sents identical  ideas  in  the  minds  of  the  disputants. 

It  is  generally  agreed  that  the  direct  outlay  for  advertising  in  the 
United  States  nms  far  over  $600,000,000  a  year,  and  there  is  a  very 

'  From  p.  T.  Cherington,  Advertising  as  a  Business  Force,  pp.  69,  429-34. 
Doubleday,  Page  &  Co.,  1913.  (Copyrighted  by  the  Associated  Advertising 
Gubs  of  America.) 


VALUB  439 

strong  temptation  to  undertake  to  say  categorically  that  that  amount 
comes  directly  out  of  the  pockets  of  some  one  element  of  the  dis- 
tribution system.  We  have  been  told  many  times  that  this  bill  is 
paid  by  the  consumer.  Somewhat  less  frequently,  but  with  equal 
emphasis,  it  has  been  declared  that  the  competitor  who  does  not 
advertise  foots  the  advertising  bill  of  the  man  who  does.  And  these 
are  only  two  of  many  explanations. 

It  will  not  be  the  purpose  of  this  chapter  to  undertake  to  close 
this  interesting  question.  The  most  that  will  be  undertaken  will  be 
a  suggestion  as  to  what  ought  to  be  clearly  understood  by  "paying" 
and  by  "advertising"  before  any  attempt  to  answer  the  question  is 
made. 

Let  us  take  the  hypothetical  case  of  a  hardware  manufacturer 
with  a  going  plant  and  an  established  distribution,  having  among  his 
products  a  patented  stove-cover  lifter  retailing  at  25  cents.  This 
specialty  never  has  been  specially  advertised,  and  it  has  been  handled 
as  a  side  line,  sold  in  connection  with  other  products  of  the  concern. 
The  output  is  100,000  a  year.  The  price  to  the  retailer  is  15  cents, 
and  to  the  wholesaler  10  cents,  and  the  actual  cost  of  production 
based  on  an  output  of  100,000  is  7  cents  each.  The  elements  of  pro- 
duction and  distribution  cost  could  then  be  represented  roughly  by 
Fig.  A  [p.  440]. 

Now  suppose  the  manufacturer,  who  has  been  figuring  on  a  net 
profit  of  3  cents  on  each  lifter,  decides  to  spend  two-thirds  of  this 
profit  in  advertising  this  lifter.  Until  that  advertising  produces  some 
kind  of  a  tangible  result  we  can  represent  it  as  coming  entirely  out 
of  the  manufacturer's  profits  (Fig.  B). 

But  suppose  this  outlay  has  been  so  judicious  as  to  double  the 
original  demand  and  raise  the  output  to  200,000  lifters  instead  of 
100,000.  By  doubling  his  output  the  manufacturer  can  produce  each 
lifter  at  a  reduced  cost.  If  we  call  this  new  cost  5  cents,  instead  of 
the  original  7  cents,  we  see  that  the  net  profit  on  each  lifter  after  pay- 
ing for  the  advertising  is  restored  to  3  cents  (Fig.  C)  as  it  was  before 
the  advertising.  But  with  the  same  net  profit  on  each  lifter  and  a 
doubled  output  the  manufacturer's  total  profit  is  doubled. 

At  the  same  time  the  doubled  business  due  to  the  advertising 
has  produced  similar  effects  in  the  distributing  system.  The  whole- 
saler's expense  of  doing  business  on  each  lifter  on  a  basis  of  100,000 
produced  was  2  cents.  But  if  the  volume  of  the  business  be  doubled 
(supposing  the  increase  to  be  distributed  proportionately  among  the 


440 


MATERL\LS  FOR  ELEMENTARY  ECONOMICS 


wholesalers)  each  wholesaler  handling  the  lifter  will  find  some  reduc- 
tion in  his  cost  of  doing  business  on  each  lifter  sold.  His  saving 
will  not  be  as  large  as  that  of  the  manufacturer,  but  his  expense  will 
be  reduced.     And  the  same  is  true  of  the  retailer  (Fig.  D). 


Price  to  Consumer  25 
Pricr  to  Retailer  15 
Price  to  Wholesaler  10 


P.C. 
3 

B. 
1 

S. 
o 

G. 
1 

P. 

3 

E.' 

2 

P.' 

3 

E.' 

6 

P." 

4 

Figure  A  —  Before  advertising. 


6 


A. 

2 


IP. 
1 


Figure  B  —  Advertising  cost  taken  from  manufacturer's  pro6t. 


P.C. 

2| 

B 

3 
4 

s. 

u 

G 

3 
4 

A. 

2 

P. 

3 

Figure  C  —  Increased  production  lowers  production  costs  absorbing  adver- 
tising cost. 


E.' 

P.' 

E.'' 

P." 

U 

3i 

^ 

H 

Figure  D- 

-  Increased  p 

roduc 

tion 

owers  disti 

ibution  costs. 

Price  to  Consumer  18 
Price  to  Retailer  HJ 
Price  to  Wholesaler  8| 


E 


P.C. 

2i 

B 

3 
4 

s. 

G 

3 
4 

A. 

2 

P. 

E.' 

n 

P.' 

E." 
4^ 

P." 

2 

Figure  E— Effect  of  lowered  price  on  cost£  and  profits. 


VALUE 


441 


Output 

100,000 

Output  200,000 

Fig.  A 

Fig.  B 

Fig.  C 

Fig.  D 

Fig.  E 

Manufacturer — 
P.C.     Prime  cost 

3 
I 
2 
I 

.  3 

I 
2 
I 
2 

I 

2i 
3 

4 

li 
3 

4 

2 
3 

2i 

i 

li 

i 
2 

3 

2i 

B.        Burden 

f 

S.         Special  selling 

ji 

G.        General 

i 

2 

A.        Advertising 

P.        Profit 

3 

li 

Price  to  wholesaler 

10 

10 
a 
3 

10 

10 
2 

3 

10 
10 

10 

10 
li 
2.h 

8^ 

Wholesaler — 

Cost 

02 
85 

E'        Expense  of  doing  business. .  . . 
P'        Profit 

I^ 
I§ 

Price  to  retailer 

15 

IS 
6 

4 

15 

IS 
6 

4 

IS 
5^ 

11^ 

Retailer — 

Cost 

iii 

E"       Expense  of  doing  business .... 
P"       Profit 

Ah 
2 

Price  to  consumer 

25 

25 

25 

18 

Each  of  these  cases,  so  far,  presupposes  that  all  prices  are  to  be 
maintained — 10  cents  to  the  wholesaler,  15  cents  to  the  retailer,  and 
25  cents  to  the  consumer.  So  long  as  the  prices  are  maintained  and 
demand  is  not  weakened  each  handler  of  the  goods  makes  more  total 
profit  when  the  output  is  increased.  Some  of  this  increase  is  due  to 
decreased  selling  expense  per  lifter,  and  some  to  the  greater  volume  of 
sales.  In  the  case  of  the  wholesalers  we  see  that  the  actual  profit 
margin  has  increased  from  3  to  3!  cents  on  each  lifter,  and,  with  the 
number  of  sales  doubled  it  appears  that  the  wholesaler  is  making  7 
cents  out  of  this  lifter  trade  where  he  formerly  made  3  cents.  By  the 
same  process  the  retailer's  total  profit  has  increased  from  4  cents  to 
two  times  5^  cents,  or  1 1  cents. 

Thus  the  manufacturer  is  making  as  much  as  he  did,  before  adver- 
tising, on  each  lifter,  and  twice  as  much  on  the  entire  business.  And 
the  wholesaler  and  retailer  are  each  making  more  on  each  article  and 
are  selling  twice  as  many.  The  consumer,  on  the  other  hand,  is 
paying  no  more  than  he  did  before.  Now  the  question  is,  who  is 
"paying"  for  the  advertising  in  this  case? 

And  now  suppose  that,  through  one  cause  or  another,  the  prices 
are  reduced  (Fig.  E)  to  18  cents  to  the  consumer,  115  cents  to  the 


442  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

retailer  and  8^  cents  to  the  wholesaler.  The  output  now  being  at 
200,000  with  corresponding  costs,  the  price  reduction  leaves  to  each 
of  these  handlers  of  the  goods,  and  to  the  manufacturer,  only  one  half 
of  the  profits  they  originally  made  on  each  piece.  But  each  is  selling 
twice  as  many  as  he  did  originally  and  hence  is  making  total  profits 
which  are  exactly  the  same  as  those  they  were  making  before  the 
advertising.  The  consumer,  however,  is  now  paying  7  cents  less  for 
lifters  than  he  did  originally.  The  question  as  to  who  "pays"  now 
takes  on  an  entirely  different  aspect.  " 

We  now  see  that  the  problem  of  "paying"  for  the  advertising  has 
to  do,  not  only  with  the  actual  outlay  for  advertising,  but  also  with  the 
relation  between  that  outlay  and  the  reduction  in  manufacturing  and 
distribution  costs  coming  from  the  increased  demand  which  that 
outlay  produces. 

And  this  case  takes  no  account  of  the  potential  future  reductions 
of  the  same  kind  which  may  follow  from  new  demand  which  has  been 
aroused  by  the  advertising  but  which  is  not  yet  converted  into  sales. 
Nor  has  any  account  been  taken  of  the  effect  of  this  stimulation  of 
demand  for  one  single  manufacturer's  output  upon  the  trade  of  his 
competitors.  And  these  are  only  two  out  of  many  other  factors  which 
have  been  left  out  of  this  case  for  the  sake  of  making  this  one  point 
clear.*  No  one  can  say  who  has  paid  for  any  piece  of  advertising 
outlay  until  he  knows  what  has  been  its  effect  on  demand — and 
consequently  on  production  and  distribution  costs  and  on  production 
and  distribution  profits. 

« Throughout  this  case  we  have  given  attention  only  to  advertising  by  the 
producer.  It  will  make  profitable  exercise  work  to  develop  similar  diagrams 
showing  the  effects  of  advertising  by  wholesalers  and  retailers. 


X.    MONEY  AND  PRICES 

125.     EXCHANGE  BY  BARTER' 

Some  years  since,  Mademoiselle  Zelie,  a  singer  of  the  The§.tre 
Lyrique  at  Paris,  made  a  professional  tour  round  the  world,  and  gave 
a  concert  in  the  Society  Islands.  In  exchange  for  an  air  from  Norma 
and  a  few  other  songs,  she  was  to  receive  a  third  part  of  the  receipts. 
When  counted,  her  share  was  found  to  consist  of  three  pigs,  twenty- 
three  turkeys,  forty-four  chickens,  five  thousand  cocoa-nuts,  besides 
considerable  quantities  of  bananas,  lemons,  and  oranges.  At  the 
Halle  in  Paris,  as  the  prima  donna  remarks  in  her  lively  letter,  printed 
by  M.  Wolowski,  this  amount  of  live  stock  and  vegetables  might  have 
brought  four  thousand  francs,  which  would  have  been  good  remunera- 
tion for  five  songs.  In  the  Society  Islands,  however,  pieces  of  money 
were  very  scarce;  and  as  Mademoiselle  could  not  consiune  any  con- 
siderable portion  of  the  receipts  herself,  it  became  necessary  in  the 
mean  time  to  feed  the  pigs  and  poultry  with  the  fruit. 

When  Mr.  Wallace  was  traveling  in  the  Malay  Archipelago,  he 
seems  to  have  suffered  rather  from  the  scarcity  than  the  super- 
abimdance  of  provisions.  In  his  most  interesting  accoimt  of  his 
travels,  he  tells  us  that  in  some  of  the  islands,  where  there  was  no 
proper  currency,  he  could  not  procure  supplies  for  dinner  without  a 
special  bargain  and  much  chaffering  upon  each  occasion.  If  the 
vendor  of  fish  or  other  coveted  eatables  did  not  meet  with  the  sort 
of  exchange  desired,  he  would  pass  on,  and  Mr.  Wallace  and  his 
party  had  to  go  without  their  dinner.  It  therefore  became  very 
desirable  to  keep  on  hand  a  supply  of  articles,  such  as  knives,  pieces 
of  cloth,  arrack,  or  sago  cakes,  to  multiply  the  chance  that  one  or 
other  article  would  suit  the  itinerant  merchant. 

The  first  difficulty  in  barter  is  to  find  two  persons  whose  disposable 
possessions  mutually  suit  each  other's  wants.  There  may  be  many 
people  wanting,  and  many  possessed  of  those  things  wanted;  but  to 
allow  of  an  act  of  barter,  there  must  be  a  double  coincidence,  which 
will  rarely  happen.  A  hunter  having  returned  from  a  successful  chase 
has  plenty  of  game,  and  may  want  arms  and  ammunition  to  renew  the 
chase.    But  those  who  have  arms  may  happen  to  be  well  supplied 

»  From  W.  S.  Jevons,  Money  and  the  Mechanism  of  Exchange,  chap.  L 

443 


444  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

with  game,  so  that  no  direct  exchange  is  possible.  In  civilized  society 
the  owner  of  a  house  may  find  it  unsuitable,  and  may  have  his  eye 
upon  another  house  exactly  fitted  to  his  needs.  But  even  if  the  owner 
of  this  second  house  wishes  to  part  with  it  at  all,  it  is  exceedingly 
unlikely  that  he  will  exactly  reciprocate  the  feelings  of  the  first  owner, 
and  wish  to  barter  houses.  Sellers  and  purchasers  can  only  be  made 
to  fit  by  the  use  of  some  commodity,  some  marchandise  banale,  as  the 
French  call  it,  which  all  are  willing  to  receive  for  a  time,  so  that  what 
is  obtained  by  sale  in  one  case,  may  be  used  in  purchase  in  another. 
This  common  commodity  is  called  a  medium  of  exchange,  because  it 
forms  a  third  or  intermediate  term  in  all  acts  of  commerce. 

A  second  difliculty  arises  in  barter.  At  what  rate  is  any  exchange 
to  be  made?  If  a  certain  quantity  of  beef  be  given  for  a  certain 
quantity  of  corn,  and  in  like  manner  com  be  exchanged  for  cheese,  and 
cheese  for  eggs,  and  eggs  for  flax,  and  so  on,  still  the  question  will  arise 
— How  much  beef  for  how  much  flax,  or  how  much  of  any  one  com- 
modity for  a  given  quantity  of  another  ?  In  a  state  of  barter  the  price- 
current  list  would  be  a  most  complicated  document,  for  each  com- 
modity would  have  to  be  quoted  in  terms  of  every  other  commodity, 
or  else  complicated  rule-of-three  sums  would  become  necessary. 
Between  one  hundred  articles  there  must  exist  no  less  than  4,950 
possible  ratios  of  exchange,  and  all  these  ratios  must  be  carefully 
adjusted  so  as  to  be  consistent  with  each  other,  else  the  acute  trader 
will  be  able  to  profit  by  buying  from  some  and  selling  to  others. 

All  such  trouble  is  avoided  if  any  one  commodity  be  chosen,  and 
its  ratio  of  exchange  with  each  other  commodity  be  quoted.  Knowing 
how  much  com  is  to  be  bought  for  a  pound  of  silver,  and  also  how 
much  flax  for  the  same  quantity  of  silver,  we  learn  without  further 
trouble  how  much  corn  exchanges  for  so  much  flax.  The  chosen 
commodity  becomes  a  common  denominator  or  common  measure  of 
value,  in  terms  of  which  we  estimate  the  values  of  all  other  goods,  so 
that  their  values  become  capable  of  the  most  easy  comparison. 

A  third,  but  it  may  be  a  minor,  inconvenience  of  barter  arises  from 
the  impossibility  of  dividing  many  kinds  of  goods.  A  store  of  com,  a 
bag  of  gold  dust,  a  carcase  of  meat,  may  be  portioned  out,  and  more  or 
less  may  be  given  in  exchange  for  what  is  wanted.  But  the  tailor,  as 
we  are  reminded  in  several  treatises  on  political  economy,  may  have  a 
coat  ready  to  exchange,  but  it  much  exceeds  in  value  the  bread  which 
he  wishes  to  get  from  the  baker,  or  the  meat  from  the  butcher.  He 
cannot  cut  the  coat  up  without  destroying  the  value  of  his  handiwork. 


MONEY  AND  PRICES  445 

It  is  obvious  that  he  needs  some  medium  of  exchange,  into  which  he 
can  temporarily  convert  the  coat,  so  that  he  may  give  a  part  of  its 
value  for  bread,  and  other  parts  for  meat,  fuel,  and  daily  necessaries, 
retaining  perhaps  a  portion  for  future  use.  Further  illustration  is 
needless;  for  it  is  obvious  that  we  need  a  means  of  dividing  and 
distributing  value  according  to  our  varying  requirements. 

126.    THE  EARLY  HISTORY  OF  MONEY* 

Living  in  civilized  communities,  and  accustomed  to  the  use  of 
coined  metallic  money,  we  learn  to  identify  money  with  gold  and 
silver;  hence  spring  hurtful  and  insidious  fallacies.  It  is  always 
useful,  therefore,  to  be  reminded  of  the  truth,  so  well  stated  by  Turgot, 
that  every  kind  of  merchandise  has  the  two  properties  of  measuring 
value  and  transferring  value.  It  is  entirely  a  question  of  degree 
what  commodities  will  in  any  given  state  of  society  form  the  most 
convenient  currency,  and  this  truth  will  be  best  impressed  upon  us  by 
a  brief  consideration  of  the  very  numerous  things  which  have  at  one 
time  or  other  been  employed  as  money.  Though  there  are  many 
numismatists  and  many  political  economists,  the  natural  history  of 
money  is  almost  a  virgin  subject,  upon  which  I  should  like  to  dilate; 
but  the  narrow  limits  of  my  space  forbid  me  from  attempting  more 
than  a  brief  sketch  of  the  many  interesting  facts  which  may  be 
collected. 

CURRENCY   IN   THE  HUNTING   STATE 

Perhaps  the  most  rudimentary  state  of  industry  is  that  in  which 
subsistence  is  gained  by  hunting  wild  animals.  The  proceeds  of  the 
chase  would,  in  such  a  state,  be  the  property  of  most  generally  recog- 
nized value.  The  meat  of  the  animals  captured  would,  indeed,  be 
too  perishable  in  nature  to  be  hoarded  or  often  exchanged;  but  it 
is  otherwise  with  the  skins,  which,  being  preserved  and  valued  for 
clothing*,  became  one  of  the  earliest  materials  of  currency.  Accord- 
ingly, there  is  abundant  evidence  that  furs  or  skins  were  employed 
as  money  in  many  ancient  nations.  They  serve  this  purpose  to  the 
present  day  in  some  parts  of  the  world. 

In  the  Book  of  Job  (2:4)  we  read,  "Skin  for  skin,  yea,  all  that  a 
man  hath  will  he  give  for  his  life";  a  statement  clearly  implying  that 
skins  were  taken  as  the  representative  of  value  among  the  ancient 
oriental  nations.    Etymological  research  shows  that  the  same  may  be 

'  From  W.  S.  Jevons,  Money  and  the  Mechanism  of  Exchange,  chap.  iv. 


446  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

said  of  the  northern  nations  from  the  earliest  times.  In  the  Esthonian 
language  the  word  rdha  generally  signifies  money,  but  its  equivalent 
in  the  kindred  Lappish  tongue  has  not  yet  altogether  lost  the 
original  meaning  of  skin  or  fur.  Leather  money  is  said  to  have 
circulated  in  Russia  as  late  as  the  reign  of  Peter  the  Great,  and  it  is 
worthy  of  notice  that  classical  writers  have  recorded  traditions  to  the 
effect  that  the  earliest  currency  used  at  Rome,  Lacedaemon,  and 
Carthage  was  formed  of  leather. 

We  need  not  go  back,  however,  to  such  early  times  to  study  the 
use  of  rude  currencies.  In  the  traflSc  of  the  Hudson's  Bay  Company 
with  the  North  American  Indians,  furs,  in  spite  of  their  differences  of 
quality  and  size,  long  formed  the  medium  of  exchange.  It  is  very 
instructive,  and  corroborative  of  the  previous  evidence  to  find  that, 
even  after  the  use  of  coin  had  become  common  among  the  Indians,  the 
skin  was  still  commonly  used  as  the  money  of  account.  Thus  Whymper 
says,  "a  gim,  nominally  worth  about  forty  shillings,  bought  twenty 
'skins.*  This  term  is  the  old  one  employed  by  the  company.  One 
skin  (beaver)  is  supposed  to  be  worth  two  shillings,  and  it  repre- 
sents two  marten,  and  so  on.  You  heard  a  great  deal  about  *  skins '  at 
Fort  Yukon,  as  the  workmen  were  also  charged  for  clothing,  etc,  in 
this  way." 

CURRENCY   IN   THE   PASTORAL   STATE 

In  the  next  higher  stage  of  civilization,  the  pastoral  state,  sheep 
and  cattle  naturally  form  the  most  valuable  and  negotiable  kind  of 
property.  They  are  easily  transferable,  convey  themselves  about, 
and  can  be  kept  for  many  years,  so  that  they  readily  perform  some  of 
the  functions  of  money. 

We  have  abundance  of  evidence,  traditional,  written,  and  etymo- 
logical, to  show  this.  In  the  Homeric  poems  oxen  are  distinctly  and 
repeatedly  mentioned  as  the  commodity  in  terms  of  which  other 
objects  are  valued.  The  arms  of  Diomed  are  stated  to  be  worth  nine 
oxen,  and  are  compared  with  those  of  Glaucos,  worth  one  hundred. 
The  tripod,  the  first  prize  for  wrestlers  in  the  23d  Iliad,  was  valued  at 
twelve  oxen,  and  a  woman  captive,  skilled  in  industry,  at  four.  It  is 
peculiarly  interesting  to  find  oxen  thus  used  as  the  common  measure 
of  value,  because  from  other  passages  it  is  probable,  as  already  men- 
tioned, that  the  precious  metals,  though  as  yet  uncoined,  were  used 
as  a  store  of  value,  and  occasionally  as  a  medium  of  exchange.  The 
several  functions  of  money  were  thus  clearly  performed  by  different 
commodities  at  this  early  period- 


MONEY  AND  PRICES  447 

In  several  languages  the  name  for  money  is  identical  with  that  of 
some  kind  of  cattle  or  domesticated  animal.  It  is  generally  allowed 
that  pecunia,  the  Latin  word  for  money,  is  derived  from  pecus,  cattle. 
From  the  Agamemnon  of  iEschylus  we  learn  that  the  figure  of  an  ox 
was  the  sign  first  impressed  upon  coins,  and  the  same  is  said  to  have 
been  the  case  with  the  earliest  issues  of  the  Roman  As.  Numismatic 
researches  fail  to  bear  out  these  traditions,  which  were  probably 
invented  to  explain  the  connection  between  the  name  of  the  coin  and 
the  animal.  A  corresponding  connection  between  these  notions  may 
be  detected  in  much  more  modem  languages.  Our  common  expres- 
sion for  the  payment  of  a  sum  of  money  is  fee,  which  is  nothing  but 
the  Anglo-Saxon /eoA,  meaning  alike  money  and  cattle,  a  word  cognate 
with  the  German  vieh,  which  still  bears  only  the  original  meaning  of 
cattle.  As  I  am  informed  by  my  friend  Professor  Theodores,  the 
same  connection  of  ideas  is  manifested  in  the  Greek  word  for  property, 
KTTJfjia,  which  means  alike  possession,  flock,  or  cattle,  and  is  referred 
by  Grimm  to  an  original  verb  k€tw  or  KCTaoD,  to  feed  cattle.  It  is 
even  supposed  by  Grimm  that  the  same  root  reappears  in  the  Teutonic 
and  Scandinavian  languages,  in  the  Gothic  skatts,  the  modem  High- 
German  schatz,  the  Anglo-Saxon  scat,  or  sceat,  the  ancient  Norsk  skat, 
all  meaning  wealth,  property,  treasure,  tax,  or  tribute,  especially  in 
the  shape  of  cattle.  This  theory  is  confirmed  by  the  fact  that  the 
Frisian  equivalent,  sket,  has  retained  the  original  meaning  of  cattle 
to  the  present  day.  In  the  Norsk,  Anglo-Saxon,  and  English,  scat  or 
scot  has  been  specialized  to  denote  tax  or  tribute. 

In  the  ancient  German  codes  of  laws,  fines  and  penalties  are  actually 
defined  in  terms  of  live-stock.  In  the  Zend  Avesta,  as  Professor 
Theodores  further  informs  me,  the  scale  of  rewards  to  be  paid  to 
physicians  is  carefully  stated,  and  in  every  case  the  fee  consists  in 
some  sort  of  cattle.  The  fifth  and  sixth  lectures  in  Sir  H.  S.  Maine's 
most  interesting  work  on  "The  Early  History  of  Institutions,"  are 
full  of  curious  information  showing  the  importance  of  Hve-stock  in  a 
primitive  state  of  society.  Being  counted  by  the  head,  the  kine  was 
called  capitale,  whence  the  economical  term  capital,  the  law  term 
chattel,  and  our  common  name  cattle. 

In  countries  where  slaves  form  one  of  the  most  common  and 
valuable  possessions,  it  is  quite  natural  that  they  should  serve  as  the 
medium  of  exchange  like  cattle.  Pausanias  mentions  their  use  in  this 
way,  and  in  Central  Africa  and  some  other  places  where  slavery  still 
flourishes,  they  are  the  medium  of  exchange  along  with  cattle  and 


448  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

ivory  tusks.  According  to  Earl's  account  of  New  Guinea,  there  is 
in  that  island  a  large  traflSc  in  slaves,  and  a  slave  forms  the  unit  of 
value.  Even  in  England  slaves  are  believed  to  have  been  exchanged 
at  one  time  in  the  manner  of  money. 

ARTICLES   OF   ORNAMENT   AS   CURRENCY 

A  passion  for  personal  adornment  is  one  of  the  most  primitive 
and  powerful  instincts  of  the  human  race,  and  as  articles  used  for 
such  purposes  would  be  durable,  universally  esteemed  and  easily  trans- 
ferable, it  is  natural  that  they  should  be  circulated  as  money.  The 
wampumpeag  of  the  North  American  Indians  is  a  case  in  point,  as  it 
certainly  served  as  jewelry.  It  consisted  of  beads  made  of  the  ends 
of  black  and  white  shells,  rubbed  down  and  polished,  and  then  strung 
into  belts  or  necklaces,  which  were  valued  according  to  their  length, 
and  also  according  to  their  color  and  luster,  a  foot  of  black  peag 
being  worth  two  feet  of  white  peag.  It  was  so  well  established  as 
currency  among  the  natives  that  the  Court  of  Massachusetts  ordered 
in  1649  that  it  should  be  received  in  the  payment  of  debts  among 
settlers  to  the  amount  of  forty  shillings.  It  is  curious  to  learn,  too, 
that  just  as  European  misers  hoard  up  gold  and  silver  coins,  the  richer 
Indian  chiefs  secreted  piles  of  wampum  beads,  having  no  better  means 
of  investing  their  superfluous  wealth. 

Exactly  analogous  to  this  North  American  currency  is  that  of  the 
cowry  shells,  which,  under  one  name  or  another — chamgos,  zimbis, 
bouges,  porcelanes,  etc. — have  long  been  used  in  the  East  Indies  as 
small  money.  In  British  India,  Siam,  the  West  Coast  of  Africa,  and 
elsewhere  on  the  tropical  coasts,  they  are  still  used  as  small  change, 
being  collected  on  the  shores  of  the  Maldive  and  Laccadive  Islands, 
and  exported  for  the  purpose.  Their  value  varies  somewhat,  accord- 
ing to  the  abundance  of  the  yield,  but  in  India  the  current  rate  used 
to  be  about  5,000  shells  for  one  rupee,  at  which  rate  each  shell  is  worth 
about  the  two-hundredth  part  of  a  penny.  Among  our  interesting 
fellow-subjects,  the  Fijians,  whale's  teeth  served  in  the  place  of 
cowries,  and  white  teeth  were  exchanged  for  red  teeth  somewhat  in 
the  ratio  of  shillings  to  sovereigns. 

Among  other  articles  of  ornament  or  of  special  value  used  as  cur- 
rency may  be  mentioned  yellow  amber,  engraved  stones,  such  as  the 
Egyptian  scarabaei,  and  tusks  of  ivory. 


MONEY  AND  PRICES  449 

CURRENCY   IN   THE   AGRICULTURAL   STATE 

Many  vegetable  productions  are  at  least  as  well  suited  for  circula- 
tion as  some  of  the  articles  which  have  been  mentioned.  It  is  not 
surprising  to  find,  then,  that  among  a  people  supporting  themselves 
by  agriculture,  the  more  durable  products  were  thus  used.  Corn  has 
been  the  medium  of  exchange  in  remote  parts  of  Europe  from  the  time 
of  the  ancient  Greeks  to  the  present  day.  In  Norway  corn  is  even 
deposited  in  banks,  and  lent  and  borrowed.  What  wheat,  barley, 
and  oats  are  to  Europe,  such  is  maize  in  parts  of  Central  America, 
especially  Mexico,  where  it  formerly  circulated.  In  many  of  the 
countries  surrounding  the  Mediterranean,  olive  oil  is  one  of  the  com- 
monest articles  of  produce  and  consumption ;  being,  moreover,  pretty 
uniform  in  quality,  durable,  and  easily  divisible,  it  has  long  served  as 
currency  in  the  Ionian  Islands,  Mytilene,  some  towns  of  Asia  Minor, 
and  elsewhere  in  the  Levant. 

Just  as  cowries  circulate  in  the  East  Indies,  so  cacao  nuts,  in  Cen- 
tral America  and  Yucatan,  form  a  perfectly  recognized  and  probably 
an  ancient  fractional  money.  Travelers  have  published  many  distinct 
statements  as  to  their  value,  but  it  is  impossible  to  reconcile  these 
statements  without  supposing  great  changes  of  value  either  in  the 
nuts  or  in  the  coins  with  which  they  are  compared.  In  152 1,  at 
Caracas,  about  thirty  cacao  nuts  were  worth  one  penny  English, 
whereas  recently  ten  beans  would  go  to  a  penny,  according  to  Squier's 
statements.  In  the  European  countries,  where  almonds  are  com- 
monly grown,  they  have  circulated  to  some  extent  like  the  cacao  nuts, 
but  are  variable  in  value,  according  to  the  success  of  the  harvest. 

It  is  not  only,  however,  as  a  minor  currency  that  vegetable  pro- 
.  ducts  have  been  used  in  modem  times.  In  the  American  settlements 
and  the  West  India  Islands,  in  former  days,  specie  used  to  become 
inconveniently  scarce,  and  the  legislators  fell  back  upon  the  device  of 
obliging  creditors  to  receive  payment  in  produce  at  stated  rates.  In 
i6i8,  the  Governor  of  the  Plantations  of  Virginia  ordered  that  tobacco 
should  be  received  at  the  rate  of  three  shillings  for  the  pound  weight, 
under  the  penalty  of  three  years'  hard  labor.  We  are  told  that,  when 
the  Virginia  Company  imported  young  women  as  wives  for  the  settlers, 
the  price  per  head  was  one  himdred  pounds  of  tobacco,  subsequently 
raised  to  one  hundred  and  fifty.  As  late  as  1732,  the  legislature  of 
Maryland  made  tobacco  and  Indian  com  legal  tenders;  and  in  1641 
there  were  similar  laws  concerning  corn  in  Massachusetts.  The 
governments  of  some  of  the  West  India  Islands  seem  to  have  made 


450  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

attempts  to  imitate  these  peculiar  currency  laws,  and  it  was  pro- 
vided that  the  successful  plaintiff  in  a  lawsuit  should  be  obliged  to 
accept  various  kinds  of  raw  produce,  such  as  sugar,  rum,  molasses, 

ginger,  indigo,  or  tobacco 

The  perishable  nature  of  most  kinds  of  animal  food  prevents  them 
from  being  much  used  as  money;  but  eggs  are  said  to  have  circulated 
in  the  Alpine  villages  of  Switzerland,  and  dried  codfish  have  certainly 
acted  as  currency  in  the  colony  of  Newfoundland. 

MANUTACTURED   AND   MISCELLANEOUS   ARTICLES   AS   CURRENCY 

The  enumeration  of  articles  which  have  served  as  money  may 
already  seem  long  enough  for  the  purposes  in  view.  I  will,  therefore, 
only  add  briefly  that  a  great  number  of  manufactured  commodities 
have  been  used  as  a  medium  of  exchange  in  various  times  and  places. 
Such  are  the  pieces  of  cotton  cloth,  called  Guinea  pieces,  used  for  traflBc 
upon  the  banks  of  the  Senegal,  or  the  somewhat  similar  pieces  circu- 
lated in  Abyssinia,  the  Soulou  Archipelago,  Sumatra,  Mexico,  Peru, 
Siberia,  and  among  the  Veddahs.  It  is  less  easy  to  imderstand  the 
origin  of  the  curious  straw  money  which  circulated  until  1694  in  the 
Portuguese  possessions  in  Angola,  and  which  consisted  of  small  mats 
called  Ubongos,  woven  out  of  rice  straw,  and  worth  about  i^d.  each. 
These  mats  must  have  had,  at  least  originally,  some  purpose  apart 
from  their  use  as  currency,  and  were  perhaps  analogous  to  the  fine 
woven  mats  so  much  valued  by  the  Samoans,  and  also  treated  by 
them  as  a  medium  of  exchange. 

Salt  has  been  circulated  not  only  in  Abyssinia,  but  in  Simiatra, 
Mexico,  and  elsewhere.  Cubes  of  benzoin  gum  or  beeswax  in  Sumatra, 
red  feathers  in  the  Islands  of  the  Pacific  Ocean,  cubes  of  tea  in  Tartary, 
iron  shovels  or  hoes  among  the  Malagasy  are  other  pecuHar  forms  of 
currency.  The  remarks  of  Adam  Smith  concerning  the  use  of  hand- 
made nails  as  money  in  some  Scotch  villages  will  be  remembered  by 
many  readers,  and  need  not  be  repeated.  M.  Chevalier  has  adduced 
an  exactly  corresponding  case  from  one  of  the  French  coalfields. 

Were  space  available  it  would  be  interesdng  to  discuss  the  not 
improbable  suggestion  of  Boucher  de  Perthes,  that,  perhaps,  after  all, 
the  finely  worked  stone  implements  now  so  frequently  discovered  were 
among  the  earliest  mediums  of  exchange.  Some  of  them  are  cer- 
tainly made  of  jade,  nephrite,  or  other  hard  stones,  only  found  in 
distant  countries,  so  that  an  active  trafl&c  in  such  implements  must 
have  existed  in  times  of  which  we  have  no  records  whatever. 


MONEY  AND  PRICES  451 

There  are  some  obscure  allusions  in  classical  authors  to  a  wooden 
money  circulating  among  the  Byzantines,  and  to  a  wooden  talent 
used  at  Antioch  and  Alexandria,  but  in  the  absence  of  fuller  informa- 
tion as  to  their  nature,  it  is  impossible  to  do  more  than  mention  them. 

127.    A  MONETARY  CHRONOLOGY' 

iy86. — Establishment  of  the  double  standard  in  the  United  States 
with  a  ratio  of  i  to  15.25;  that  is,  on  the  basis  of  123.134  grains  of 
fine  gold  for  the  half  eagle,  or  $5  piece,  and  375.64  grains  of  fine 
silver  for  the  dollar,  without  any  actual  coinage. 

17 Q2. — Adoption  of  the  ratio  of  i  to  15  and  estabhshment  of  a 
mint  with  free  and  gratuitous  coinage  in  the  United  States;  the  silver 
dollar  equal  to  371^  grains  fine,  the  eagle  to  247^  grains  fine. 

iyQ2-i8i2. — The  First  Bank  of  the  United  States.  It  rendered 
good  service  as  the  fiscal  agent  of  the  government  and  as  a  check  upon 
issues  by  state  banks.  This  latter  service  was  performed  by  present- 
ing state  bank  notes  for  redemption. 

i8o§. — Ceased  coining  the  silver  dollar.  By  the  operation  of 
Gresham's  law  the  most  of  those  already  coined  had  gone  to  the  West 
Indies.    The  coinage  of  the  silver  dollar  was  renewed  in  1836. 

1812-16. — Period  of  rapid  expansion  of  state  banks. 

1816-36. — ^The  Second  Bank  of  the  United  States.  This  bank 
rendered  service  similar  to  the  First. 

1834. — Substitution  of  the  ratio  of  i  to  16  for  that  of  i  to  15  in  the 
United  States  by  reducing  the  weight  of  the  eagle,  ten-dollar  gold 
piece,  from  270  grains  to  258  grains. 

In  1837  the  fineness  of  the  United  States  gold  coins  was  raised  from 
.899,225  to  .900,  and  the  silver  coins  from  .8924  to  .900,  giving  a 
ratio  of  I  to  15 .  988,  and  fixing  the  standard  weight  of  the  silver  dollar 
at  412^  grains. 

1841. — Discovery  of  the  gold  mines  of  California. 

1851. — Discovery  of  the  gold  mines  of  Australia. 

1853. — ^Lowering  of  the  weight  of  silver  pieces  of  less  value  than  $1, 
to  the  extent  of  7  per  cent  in  the  United  States,  and  limitation  of  their 
legal-tender  power  to  $5. 

1853. — Maximum  of  the  production  of  gold  reached  in  California, 
when  it  amounted  to  $65,000,000. 

1861. — The  United  States  Government  issued  "demand  notes." 

'  Adapted  from  Circular  No.  52,  United  States  Treasury  Department  (1913), 
pp.  41-45- 


452  NrATERI.\LS  FOR  ELEMENTARY  ECONOMICS 

1862. — The  United  States  Government  began  to  issue  the  "Legal 
Tender"  or  "greenbacks." 

1862-yQ. — The  period  of  suspension  of  specie  payments. 

1863. — National  bank  act  passed. 

1866. — An  act  to  provide  for  the  gradual  retiring  of  the  green- 
backs.   This  act  was  suspended  by  the  act  of  1868. 

1873. — Panic.  In  response  to  popular  demand  26,000,000  of 
the  canceled  greenbacks  were  re-issued. 

1^7 J. — Increase  of  the  intrinsic  value  of  the  subsidiary  coins  of  the 
United  States.  Replacing  of  the  double  standard  by  the  gold  stand- 
ard. Reduction  of  the  cost  of  coinage  of  gold  to  one-fifth  per  cent, 
the  total  abolition  of  which  charge  was  decreed  in  1875.  Creation  of 
a  trade  dollar  of  420  grains  with  a  fineness  of  .  900. 

1875. — Act  providing  for  resumption  of  specie  payments,  January 
I,  1879,  was  passed.  This  act  provided  for  the  reduction  of  the  green- 
backs to  $300,000,000.  The  act  of  1878  stopped  this  reduction. 
The  amount  then,  as  now,  outstanding  was  $346,681,016. 

1878. — Act  of  United  States  Congress  providing  for  the  purchase, 
from  time  to  time,  of  silver  bullion,  at  the  market  price  thereof,  of 
not  less  than  $2,000,000  worth  per  month  as  a  minimum,  nor  moie 
than  $4,000,000  worth  per  month  as  a  ma.ximum,  and  its  coinage  a^ 
fast  as  purchased  into  silver  dollars  of  4125  grains.  The  coinage  of 
silver  on  private  account  prohibited. 

iSyg. — Resumption  of  specie  payments. 

i8go. — United  States — Repeal  of  the  act  of  February  28,  1878, 
commonly  known  as  Bland-Allison  law,  and  substitution  of  authority 
for  purchase  of  4,500,000  fine  ounces  of  silver  each  month,  to  be  paid 
for  by  issue  of  Treasury  Notes  ("the  Treasury  Notes  of  1890") 
payable  in  coin. 

i8g3. — Panic.  The  "  endless  chain  "of  redemption  of  United  States 
notes  at  the  Treasury.  Repeal  of  the  purchasing  clause  of  the  act 
of  1890. 

1900. — The  gold  standard  formally  adopted  in  the  United  States. 

igo8. — An  act  providing  for  emergency  note  issue  by  national  banks. 

/■y/j. — The  Federal  Reserve  Act. 

u8.     HISTORY  OF  COINS  AND  CURRENCY  OF  THE 
UNITED   STATES' 

In  1786  the  Congress  of  the  Confederation  chose  as  the  monetary 
unit  of  the  United  States  the  dollar  of  375.64  grains  of  pure  silver. 
This  unit  had  its  origin  in  the  Spanish  piaster  or  milled  dollar,  which 

'  From  Circular  No.  52,  United  States  Treasury  Department  (1912),  pp.  aS"*?. 


MONEY  AND  PRICES  453 

constituted  the  basis  of  the  metallic  circulation  of  the  English  colonies 
in  America.  It  was  never  coined,  there  being  at  that  time  no  mint  in 
the  United  States. 

The  act  of  April  2,  1792,  established  the  first  monetary  system  of 
the  United  States.  The  bases  of  the  system  were:  The  gold  dollar  or 
unit,  containing  24.75  grains  of  pure  gold,  and  stamped  in  pieces  of 
$10,  $5,  and  $2^,  denominated,  respectively,  eagles,  half  eagles,  and 
quarter  eagles;  the  silver  dollar  or  imit,  containing  371.25  grains  of 
pure  silver.  A  mint  was  established.  The  coinage  was  unlimited, 
and  there  was  no  mint  charge.  The  ratio  of  gold  to  silver  in  coinage 
was  I  to  15.  Both  gold  and  silver  were  legal  tender.  The  standard 
was  double. 

The  act  of  1792  undervalued  gold,  which  was  therefore  exported. 
The  act  of  June  28,  1834,  was  passed  to  remedy  this,  by  changing  the 
mint  ratio  between  the  metals  to  i  to  16.002.  This  latter  act  fixed 
the  weight  of  the  gold  dollar  at  25.8  grains,  but  lowered  the  fineness 
from  o .  916I  to  o .  899225.  The  fine  weight  of  the  gold  dollar  was  thus 
reduced  to  23.2  grains.  The  act  of  1834  undervalued  silver,  as  that 
of  1792  had  undervalued  gold,  and  silver  was  attracted  to  Europe  by  the 
more  favorable  ratio  of  i  to  15^.  The  act  of  January  18,  1837,  was 
passed  to  make  the  fineness  of  the  gold  and  silver  coins  uniform. 
The  legal  weight  of  the  gold  dollar  was  fixed  at  25.8  grains  and  its 
fine  weight  at  23.22  grains.  The  fineness  was  therefore  changed  by 
this  act  to  0.900  and  the  ratio  to  i  to  15. 988+. 

Silver  continued  to  be  exported.  The  act  of  February  21,  1853, 
reduced  the  weight  of  the  silver  coins  of  a  denomination  less  than  $1, 
which  the  acts  of  1792  and  1837  had  made  exactly  proportional  to  the 
weight  of  the  silver  dollar,  and  provided  that  they  should  be  legal 
tender  to  the  amount  of  only  $5.  Under  the  acts  of  1792  and  1837 
they  had  been  full  legal  tender.  By  the  act  of  1853  the  legal  weight 
of  the  half  dollar  was  reduced  to  192  grains  and  that  of  the  other 
fractions  of  a  dollar  in  proportion.  The  coinage  of  the  fractional 
parts  of  the  dollar  was  reserved  to  the  Government. 

The  act  of  February  12,  1873,  provided  that  the  miit  of  value  of  the 
United  States  should  be  the  gold  dollar  of  the  standard  weight  of  25.8 
grains,  and  that  there  should  be  coined,  besides,  the  following  gold 
coins:  A  quarter  eagle,  or  2 ^-dollar  piece;  a  3-dollar  piece;  a  half 
eagle,  or  5-dollar  piece;  an  eagle,  or  lo-doUar  piece,  and  a  double 
eagle,  or  20-dollar  piece,  all  of  a  standard  weight  proportional  to  that 
of  the  dollar  piece.  These  coins  were  made  legal  tender  in  all  pay- 
ments at  their  nominal  value  when  not  below  the  standard  weight  and 


454  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

limit  of  tolerance  provided  in  the  act  for  the  single  piece,  and  when 
reduced  in  weight  they  should  be  legal  tender  at  a  valuation  in  propor- 
tion to  their  actual  weight.  The  silver  coins  provided  for  by  the  act 
were  a  trade  dollar;  a  half  dollar,  or  50-cent  piece;  a  quarter  dollar; 
and  a  lo-cent  piece;  the  weight  of  the  trade  dollar  to  be  420  grains 
troy;  the  half  dollar,  12^  grams;  the  quarter  dollar  and  the  dime, 
respectively,  one-half  and  one-fifth  of  the  weight  of  the  half  dollar. 
These  silver  coins  were  made  legal  tender  at  their  nominal  value  for 
any  amount  not  exceeding  $5  in  any  one  payment.  The  charge  for 
converting  standard  gold  bullion  into  coin  was  fixed  at  one-fiith  of 
I  per  cent.  Owners  of  silver  bullion  were  allowed  to  deposit  it  at 
any  mint  of  the  United  States,  to  be  formed  into  bars  or  into  trade 
dollars,  and  no  deposit  of  silver  for  other  coinage  was  to  be  received. 

Section  2  of  the  joint  resolution  of  July  22,  1876,  recited  that  the 
trade  dollar  should  not  thereafter  be  legal  tender,  and  that  the  Secre- 
tary of  the  Treasury  should  be  authorized  to  limit  the  coinage  of  the 
same  to  an  amount  sufficient  to  meet  the  export  demand  for  it.  The 
act  of  February  19,  1887,  retired  the  trade  dollar  and  prohibited  its 
coinage;  that  of  September  26,  1890,  discontinued  the  coinage  of  the 
I -dollar  and  3-dollar  gold  pieces. 

The  act  of  February  28,  1878,  directed  the  coinage  of  silver  dollars 
of  the  weight  of  4125  grains  troy,  of  standard  silver,  as  provided  in 
the  act  of  January  18,  1837,  and  that  such  coins,  with  all  standard 
silver  dollars  theretofore  coined,  should  be  legal  tender  at  their  nomi- 
nal value  for  all  debts  and  dues,  public  and  private,  except  where 
otherwise  expressly  stipulated  in  the  contract. 

The  Secretary  of  the  Treasury  was  authorized  and  directed  by  the 
first  section  of  the  act  to  purchase  from  time  to  time  silver  bullion  at 
the  market  price  thereof,  not  less  than  $2,000,000  worth  nor  more 
than  $4,000,000  worth  per  month,  and  to  cause  the  same  to  be  coined 
monthly,  as  fast  as  purchased,  into  such  dollars.  A  subsequent  act, 
that  of  July  14,  1890,  enacted  that  the  Secretary  of  the  Treasury 
should  purchase  silver  bullion  to  the  aggregate  amount  of  4,500,000 
ounces,  or  so  much  thereof  as  might  be  offered,  each  month,  at  the 
market  price  thereof,  not  exceeding  $1  for  371 .  25  grains  of  pure  silver, 
and  to  issue  in  payment  thereof  Treasury  notes  of  the  United  States, 
such  notes  to  be  redeemable  by  the  Government,  on  demand,  in  coin, 
and  to  be  legal  tender  in  payment  of  all  debts,  public  and  private, 
except  where  otherwise  expressly  stipulated  in  the  contract.  The  act 
directed  the  Secretary  of  the  Treasury  to  coin  each  month  2,000,000 


MONEY  AND  PRICES  455 

ounces  of  the  silver  bullion  purchased  under  the  provisions  of  the  act 
into  standard  silver  dollars  until  the  ist  day  of  July,  1891,  and  there- 
after as  much  as  might  be  necessary  to  provide  for  the  redemption  of 
the  Treasury  notes  issued  under  the  act.  The  purchasing  claase  of 
the  act  of  July  14,  1890,  was  repealed  by  the  act  of  November  i,  1893. 

The  act  of  Jime  9,  1879,  made  the  subsidiary  silver  coins  of  the 
United  States  legal  tender  to  the  amount  of  $10.  The  minor  coins 
are  legal  tender  to  the  amount  of  25  cents. 

The  act  of  March  14,  1900,  declares  that  the  dollar,  consisting  of 
25.8  grains  of  gold  .900  fine  "shall  be  the  standard  unit  of  value," 
and  makes  it  the  duty  of  the  Secretary  of  the  Treasury  to  maintain 
at  a  parity  of  value  with  this  standard  all  forms  of  money  issued  or 
coined  by  the  United  States. 

129.     REDEMPTION  OF  UNITED  STATES  MONEY' 

Gold  coins  and  standard  silver  dollars,  being  standard  coins  of  the 
United  States,  are  not  "redeemable." 

Subsidiary  coins  and  minor  coins  may  be  presented,  in  sums  or 
multiples  of  $20,  to  the  Treasurer  of  the  United  States  or  to  an 
assistant  treasurer  for  redemption  or  exchange  into  lawful  money. 

United  States  notes  are  redeemable  in  United  States  gold  coin  in 
any  amount  by  the  Treasurer  and  all  the  assistant  treasurers  of  the 
United  States. 

Treasury  notes  of  iSgo  are  redeemable  in  United  States  gold  coin 
in  any  amount  by  the  Treasurer  and  all  the  assistant  treasurers  of  the 
United  States. 

'National-hank  notes  are  redeemable  in  lawful  money  of  the  United 
States  by  the  Treasurer,  but  not  by  the  assistant  treasurers.  They 
are  also  redeemable  at  the  bank  of  issue.  In  order  to  provide  for  the 
redemption  of  its  notes  when  presented,  every  national  bank  is 
required  by  law  to  keep  on  deposit  with  the  Treasurer  a  sum  equal  to 
5  per  cent  of  its  circulation. 

Gold  certificates,  being  receipts  for  gold  coin,  are  redeemable  in  such 
coin  by  the  Treasurer  and  all  assistant  treasurers  of  the  United  States. 

Silver  certificates  are  receipts  for  standard  silver  dollars  deposited, 
and  are  redeemable  in  such  dollars  only. 

"Coin"  obligations  of  the  government  are  redeemed  in  gold  coin 
when  gold  is  demanded  and  in  silver  when  silver  is  demanded. 

From  Circular  No.  52,  United  States  Treasury  Department  (191 2),  pp.  40-41. 
[For  Federal  Reserve  Notes  see  Selection  1S9. — Editors.] 


456  MATERIALS  FOR  ELEMENTARV  ECONOMICS 

130.   LEGAL-TENDER  QUALITIES  OF  UNITED  STATES  MONEY' 

There  are  ten  different  kinds  of  money  in  circulation  in  the  United 
States,  namely,  gold  coins,  standard  silver  dollars,  subsidiary  silver, 
gold  certificates,  silver  certificates.  Treasury  notes  issued  under  the 
act  of  July  14,  1890,  United  States  notes  (also  called  greenbacks  and 
legal  tenders),  national-bank  notes,  and  nickel  and  bronze  coins. 
These  forms  of  money  are  all  available  as  circulation.  While  they  do 
not  all  possess  the  full  legal-tender  quality,  each  kind  has  such  attri- 
butes as  to  give  it  currency.     The  status  of  each  kind  is  as  follows: 

Gold  coin  is  legal  tender  at  its  nominal  or  face  value  for  all  debts, 
public  and  private,  when  not  below  the  standard  weight  and  limit  of 
tolerance  prescribed  by  law;  and  when  below  such  standard  and 
limit  of  tolerance  it  is  legal  tender  in  proportion  to  its  weight. 

Stafidard  silver  dollars  are  legal  tender  at  their  nominal  or  face 
value  in  payment  of  all  debts,  public  and  private,  without  regard  to 
the  amount,  except  where  otherwise  expressly  stipulated  in  the  contract. 

Subsidiary  silver  is  legal  tender  for  amounts  not  exceeding  $10  in 
any  one  payment. 

Treasury  notes  of  the  act  of  July  14,  i8go,  are  legal  tender  for  all 
debts,  public  and  private,  except  where  otherwise  expressly  stipu- 
lated in  the  contract. 

United  States  notes  are  legal  tender  for  all  debts,  public  and  private, 
except  duties  on  imports  and  interest  on  the  public  debt.' 

Gold  certificates,  silver  certificates,  and  national-hank  notes  are  not 
legal  tender,  but  both  classes  of  certificates  are  receivable  for  all 
public  dues,  while  national-bank  notes  are  receivable  for  all  public 
dues  except  duties  on  imports,  and  may  be  paid  out  by  the  Govern- 
ment for  all  salaries  and  other  debts  and  demands  owing  by  the 
United  States  to  individuals,  corporations,  and  associations  within 
the  United  States,  except  interest  on  the  public  debt  and  in  redemp- 
tion of  the  national  currency.  All  national  banks  are  required  by 
law  to  receive  the  notes  of  other  national  banks  at  par. 

The  minor  coins  of  nickel  and  copper  are  legal  tender  to  the 
extent  of  25  cents. 

Foreign  coins  are  not  legal  tender. — Section  3584  of  the  Revised 
Statutes  of  the  United  States  provides  that  no  foreign  coins  shall  be 
a  legal  tender  in  the  United  States. 

'  From  Ciradar  No.  52,  United  States  Treasury  Department  (1912),  pp.  28-29. 

'  United  States  notes,  upon  resumption  of  specie  payments,  January  i,  1879, 
became  acceptable  in  payment  of  duties  on  imports  and  have  been  freely  received 
on  that  account  since  the  above  date,  but  the  law  has  not  been  changed. 


MONEY  AND  PRICES 


457 


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.V. 


458  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

132.    PRINCIPLES  OF  TOKEN  MONEY' 

As  now  understood  and  practiced,  a  correct  system  of  token  money 
would  conform  to  the  following  principles: 

1.  Such  a  reduction  in  weight  and  value  below  the  standard 
unit  as  would  prevent  exportation  and  yet  not  place  a  premium  on 
counterfeiting. 

2.  Coinage  only  on  government  account;  that  is,  no  free  coinage. 

3.  Limited  legal-tender  power. 

4.  Protection  against  excessive  quantity  by  direct  redemption 
on  presentation  in  proper  amounts,  which  also  maintains  its  fao-" 
value. 

As  a  matter  of  course,  countries  have  not  always  had  clear  con- 
ceptions regarding  this  kind  of  money,  so  that  the  principles  just 
enumerated  have  come  forth  only  by  a  process  of  evolution  out  of 
experience.  For  example,  in  the  United  States  the  first  rule  was  not 
observed  until  1853;  not  until  it  was  discovered  that  the  same  causes 
which  led  to  the  disappearance  of  the  dollar  piece  (of  371  j  grains  pure 
silver)  soon  after  1834  also  removed  the  subsidiary  coins  (two  halves 
or  four  quarters,  etc.,  then  also  containing  371J  grains  pure  silver). 
This  was  the  reason  why  we  were  driven  to  such  shifts  to  use  foreign 
coins  for  small  change.  In  1853,  our  subsidiary  coins  were  reduced 
to  345.6  grains  of  pure  silver  for  two  halves,  four  quarters,  or  ten 
dimes.  This  reduction  in  weight  by  about  6  per  cent  kept  the  bullion 
value  of  the  token  coins  below  that  of  both  the  gold  and  silver  dollars, 
and  they  circulated  freely.  They  were  worth  more  as  small  change 
than  as  bullion. 

As  regards  the  second  law  it  is  evident  that  if  coins  are  issued  at  a 
value  above  the  cost  of  the  bullion  in  them,  the  issuer  gains  this 
profit,  or  seigniorage.  Hence  the  coinage  should  not  be  allowed  to  a 
private  person  but  should  be  restricted  to  the  state,  to  which  the  profits 
should  accrue.  This  is  all  the  more  necessary  if  the  duty  is  laid 
upon  the  state  to  redeem  the  coins  upon  demand. 

The  reason  for  the  third  law  is  obvious.  The  standard  coins 
being  ordinarily  issued  only  in  multiples  of  a  unit,  there  must  fre- 
quently be  fractional  sums  represented  in  a  debt;  and  the  same  con- 
siderations which  demand  that  the  kind  of  money  to  satisfy  the'major 
part  of  the  debt  shall  be  clearly  defined  in  law,  also  require  that 

'  From  Report  ojthe  Monetary  Commission  of  the  Indianapolis  Convention  (1898), 
pp.  113-16. 


MONEY  AND  PRICES  459 

some  method  of  legally  satisfying  the  fractional  portions  should  be  in- 
dicated. Consequently,  the  token  coins  are  made  legal  tender  for  this 
purpose.  On  the  other  hand,  a  payment  of  a  debt  in  large  amoimts 
of  over-valued  coins,  these  being  of  small  denomination  and  hence 
heavy  and  cumbrous  in  large  sums,  would  be  a  serious  inconvenience. 
If,  therefore,  the  legal-tender  quality  conferred  on  token  coins  were 
unlimited,  the  power  might  be  abused  by  a  captious  debtor,  who 
might  insist  on  making  some  large  payments  in  these  coins  for  the 
purpose  of  annoying  the  creditor.  Minor  and  subsidiary  coins 
have  usually  been  made  a  legal  tender,  therefore,  only  to  limited 
amounts. 

A  person  obliged  to  make  remittances  abroad  might  have  been 
paid  here  in  over-valued  token  coins,  which,  not  being  worth  in 
foreign  countries  more  than  the  bullion  they  contained,  would  be 
short  payment  and  could  not  be  used  abroad.  Unless  he  could 
exchange  token  coins  for  full-valued  standard  coins  which  would  be 
equally  good  abroad  as  v/ell  as  at  home,  he  would  find  business 
decidedly  venturesome.  Consequently  the  necessity  for  the  fourth 
law  becomes  at  once  apparent.  Indeed,  redemption  is  a  fundamental 
necessity  for  a  system  of  token  coins.  Inasmuch  as  no  government 
can  ever  foretell  the  ambimt  which  the  community  will  absorb,  it  must 
be  ready  to  freely  provide  token  coins  in  exchange  for  standard  coins 
whenever  needed;  and  to  prevent  an  excess  from  clogging  the  tills  of 
merchants  it  must  be  equally  ready  to  pay  out  standard  coins  in  ex- 
change for  token  coins  whenever  the  latter  are  sent  in  to  the  Treasury. 
Thus  free  exchange  of  token  coins  for  gold  and  of  gold  for  token 
coins,  is  the  only  proper  method  by  which  an  excess  in  quantity 
is  automatically  prevented.  If  wanted,  they  are  obtainable;  if 
redundant,  they  are  inevitably  withdrawn.  Without  a  method  of 
redemption  direct  or  indirect,  token  or  debased  coins  would  certainly 
go  to  a  discount  if  issued  to  excess,  because,  not  being  received  equally, 
with  standard  coins,  a  discrimination  against  them  would  mani- 
fest itself.  Not  having  in  themselves  a  value  equal  to  their  face 
value,  they  must  borrow  the  deficiency  only  from  the  process  by 
which  they  can  be  exchanged  at  par  with  full-valued  coins.  By 
the  act  of  1879  subsidiary  coins  may  be  exchanged  for  lawful  money 
in  sums  of  twenty  dollars  and  multiples  thereof. 

In  addition  to  the  removal  of  excessive  issues  from  the  circulation, 
redemption  of  token  coins  performs  an  important  function  in  the 
distribution  and  redistriburion  of  such  coins  as  are  needed.    Without 


460  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

redemption,  nickels,  for  example,  would  accumulate  in  large  amounts 
on  the  hands  of  the  street  car  companies;  for  it  would  be  inconvenient 
or  impossible  for  these  companies  to  find  those  who  might  want  small 
change,  and  it  would  be  difficult  for  them  to  get  rid  of  large  accumula- 
tions at  full  value.  But  the  system  of  redemption  offers  the  means 
whereby  those  who  have  too  much  can  dispose  of  their  surplus,  and 
those  who  have  not  enough  can  get  more.  The  Treasury  thus  acts 
as  a  distributor  of  the  supply  of  token  coins. 

Lastly,  the  community  will  need  only  a  limited  amount  of  token 
coins  for  small  change.  What  this  sum  will  be  can  be  determined 
only  by  experience.  No  one  can  foretell  how  many  dimes  or  quarters 
will  be  needed  in  the  daily  transactions  in  which  money  is  necessarily 
used.  There  must,  therefore,  be  freedom  in  issuing  all  that  is 
wanted.  Safety  is  to  be  found  in  a  prompt  redemption  of  those 
which  the  public  do  not  need.  In  small  denominations  a  very  large 
number  of  pieces  may  be  required,  but  the  total  value  may  be 
inconsiderable;  for  larger  denominations  of  no  greater  number  of 
pieces  the  total  sum  may  be  quite  important.  The  inconvenience 
of  not  having  money  for  large  and  small  change  is  so  great  that  if 
the  government  did  not  provide  it  in  a  form  that  will  circulate 
(as  before  1853  and  again  in  July,  1862)  some  substitutes  are  neces- 
sarily provided  by  merchants.  The  demand  for  token  coins  is  there- 
fore, up  to  a  certain  limit,  strong  and  steady,  and  if  the  issues  are 
within  this  limit  there  will  be  no  net  redemption.  The  coins  presented 
by  one  individual  or  class  will  be  withdrawn  by  others  for  use  in  the 
channels  where  they  are  wanted. 


MONEY  AND  PRICES 


461 


^33- 


PRODUCTION  OF  GOLD  AND  SILVER  IN  THE  WORLD 

SINCE  1492' 


[From  1493  to  1885  is  from  a  table  of  averages  for  certain  periods  compiled  by  Dr.  Adolpb  Soetbeer; 
foi  the  years  1S86  to  1910  tbe  production  is  the  annual  estimate  of  the  Bureau  of  the  Mint.] 


Fine  Ounces  of 

Fine  Ounces  or 

Gold 

Silver 

Percentage  or  Production 

000  Omitted 

OOoOlCTTED 

Period 

Annual 

Total  for 

Annual 

Total  for 

By  Weight 

By  Value 

Average 
for  Period 

Period 

Average 
for  Period 

Period 

Gold 

Silver 

Gold 

Silver 

1493-1520- •• 

186 

5.221 

1,5" 

42,309 

11 

89 

66.4 

33.6 

1521-1544.. . 

230 

5.524 

2,899 

69,598 

7-4 

92.6 

55-9 

44.1 

iS4S-is6o.. . 

373 

4.377 

10,017 

160,287 

2-7 

97-3 

30.4 

69.6 

1561-1580.. . 

319 

4.398 

9,628 

192,578 

3.3 

97.8 

36.7 

73-3 

1581-1600.. . 

237 

4,745 

13.467 

269,353 

1.7 

98.3 

33 

78 

1 601-1620.. . 

273 

5,478 

13,596 

271,924 

f 

98 

24-4 

75-6 

1621-1640.. . 

266 

5,336 

13,654 

353.084 

2.1 

97-9 

2S.3 

74.8 

1641-1660.. . 

381 

5,639 

11,776 

335.530 

3.3 

97-7 

27.7 

72.3 

1661-1680.. . 

397 

5,954 

10,834   . 

316,691 

3.7 

97-3 

30.5 

69-5 

1681-1700. . . 

346 

6,921 

10,993 

319,841 

3-1 

96.9 

33-5 

66.5 

1701-1720.. . 

413 

8,243 

11.432 

228,650 

35 

96  5 

36.6 

73  4 

1721-1740... 

613 

12,268 

13.863 

377,261 

4-3 

95-8 

41-4 

58.6 

1741-1760.. . 

791 

15,824 

17,140 

342,812 

4.4 

95.6 

43. s 

57.5 

1761-1780.. . 

66s 

13,313 

20,985 

419,711 

3-1 

96.9 

33-7 

66.3 

1781-1800... 

S7I 

11,438 

28,261 

565,33s 

1 

98 

24-4 

7S.6 

1801-1810.. . 

S7I 

S.715 

28,746 

387,469 

1-0 

98.1 

24.1 

759 

1811-1820.. . 

367 

3.679 

17,385 

173,857 

a. I 

97-9 

25.3 

74.7 

1821-1830.. . 

457 

4.570 

14,807 

148,070 

3 

97 

33 

67 

1831-1840.. . 

652 

6,522 

19.175 

191.758 

3.3 

96.7 

35-2 

64.8 

1841-1850.. . 

1,760 

I 7. 60s 

35,090 

350,903 

6.6 

93-4 

52-9 

47-1 

1851-1855... 

6,410 

32,051 

38,488 

143,443 

18.4 

81.6 

78.3 

31.7 

1856-1860.. . 

6,486 

32,431 

29.09s 

145,477 

18.3 

81.8 

78.1 

31.9 

1861-1865... 

5.949 

29.747 

35,401 

177,009 

14-4 

85.6 

72.9 

27.1 

1866-1870... 

6,270 

31.350 

43,051 

315,357 

12.7 

87.3 

7° 

30 

1871-1875.- • 

5,591 

27,9SS 

63,317 

316,585 

8.1 

91.9 

58.5 

41.5 

1876-1880. . . 

5.543 

27.71S 

78,77s 

393.878 

6.6 

93-4 

S3 

47 

1881-1885.. . 

4.794 

23,973 

92.003 

460,019 

s 

95 

45-S 

54-5 

1886-1890.. . 

S.461 

37,306 

108,911 

544,577 

4-8 

95-2 

44-5 

55-5 

1891-1895. .. 

7.882 

39,412 

157.581 

787.906 

4-8 

95-2 

44-4 

SS.6 

1896-1900.. . 

12,446 

62,234 

165,693 

828,466 

7 

93 

54-6 

45. 4 

I90l.„ 

12,625 

12,62s 

173,011 

173.011 

6.8 

93-2 

S3.8 

46.3 

190a 

14,354 

14,354 

162,763 

162,763 

8.1 

91.9 

58. 5 

41.5 

1003 

15.852 

15.853 

167,689 

167,689 

8.6 

91.4 

60.2 

39.8 

igo4- 

16,804 

16,804 

164,19s 

164,19s 

9-3 

90.7 

63.1 

37.9 

190s 

18,396 

18,396 

172,317 

172,317 

9.6 

90.4 

63.1 

36.9 

1906 

19.471 

165,054 

'li 

89.5 

65.3 

34  7 

1907 

19.977 

184,206 

90.3 

63 -4 

36.6 

1908 

21,422 

203,131 

9-5 

90. s 

62.8 

37-2 

1909 

21,696 

210,453 

9-4 

90.6 

63.5 

37  5 

1910 

21,996 

222,879 

9.0 

91 .0 

61.  a 

38.8 

Total... 

669,828 

10,654,233 

5  9 

94.1 

so.  I 

49-9 

Adapted  from  Circular  No.  52,  United  States  Treasury  Department  U912),  pp.  64-65. 


463 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


134.     COMMERCIAL   RATIO  OF   SILVER  TO  GOLD  ANNUALLY 

SINCE  1687' 

NoTX. — ^From  1687  to  1832  the  ratios  are  taken  from  Dr.  A.  Soetbeer;  from  1833  to  1878  from 
Pixley  and  Abell's  tables,  from  1879  to  1894  from  daily  cablegrams  from  London  to  the  Bureau  of  the 
Mint;   and  since  that  time  from  daily  quotations  in  the  public  press. 


Year 

Ratio 

Yea 

iT    Ratio 

Year 

Ratio 

Year 

Ratio 

Year 

Ratio 

X687 

14  94 

1733 

...  15.09 

1777 

1454 

1822... 

15.80 

1867 

15. 57 

1688 

>4  94 

1733 

...  15.18 

1778.... 

14.68 

1823... 

15 

84 

1868 

15. 59 

1689 

15.03 

1734 

...  15. 39 

1779 

14.80 

1824... 

15 

83 

1869 

15.60 

1690 

IS.OJ 

I73S 

...  15.41 

1780.... 

14  73 

1825... 

IS 

70 

1870 

15-57 

169X 

14.98 

1736 

...  15.18 

1781 

14.78 

1826... 

ts 

76 

1871 

15.57 

x6o3 

14.9a 

1737 

...  15.03 

1783 

14.43 

1827... 

IS 

74 

187a 

15.63 

X693 

14.83 

1738 

...  14.91 

1783.... 

14.48 

1828... 

15 

78 

1873-.. . 

15.9a 

X694 

14.87 

1739 

...  14.91 

1784.... 

14.70 

1829... 

15 

78 

1874-.. . 

16.17 

1695 

xs.oi 

1740 

...  14.94 

1785.... 

14.9a 

1830... 

15 

83 

1875-.. . 

16.59 

xe^e 

IS. 00 

1741 

...  14.9a 

1786.... 

14.96 

1831... 

IS 

73 

1876 

17.88 

1697 

15.  »o 

1743 

...  14.85 

1787.... 

14.93 

183a... 

IS 

73 

1877---. 

17.2a 

X698 

15.07 

1743 

...  14.85 

1788.... 

14.65 

1833... 

15 

93 

1878 

17.94 

X699 

X4.94 

1744 

...  14.87 

1789.... 

14. 75 

1834-.. 

15 

73 

1879.... 

18.40 

1700 

14.81 

1745 

...  14.98 

1790 

15.04 

1835-.. 

IS 

80 

1880 

18.0s 

X701 

15.07 

1746 

...  1513 

1791 

15.05 

1836... 

IS 

73 

1881 

18.16 

170a 

15. Sa 

1747 

...  15.36 

179a 

15.17 

1837... 

IS 

83 

1882 

18.19 

X703 

15.17 

1748 

...  15.11 

1793 

15.00 

1838... 

IS 

85 

1883 

18.64 

X704 

15.23 

1749 

...  14.80 

1794 

15. 37 

1839... 

IS 

63 

1884 

18-57 

X70S 

15. II 

1750 

...  1455 

1795 

15.55 

1840. . . 

IS 

03 

1885 

19.41 

1706 

15.37 

I7SI 

...  14.39 

1796 

15.65 

1841... 

15 

70 

1886 

20.78 

X707 

IS. 44 

1753 

...  14. 54 

1797 

15.41 

184a... 

15 

87 

1887 

31  .13 

1708 

15.41 

1753 

...  14.54 

r.798.... 

1SS9 

1843-.. 

IS 

93 

1888 

31. 99 

1709 

15.31 

1754 

...  14.48 

1799-... 

15.74 

1844. . . 

IS 

8S 

1889.... 

33.10 

1710 

15. aa 

1755 

...  14.68 

1800 

15.68 

1845... 

IS 

93 

1890 

19.76 

X7XI 

15-39 

1756 

...  14.94 

1801 

15-46 

1846. . . 

IS 

90 

1891.... 

ao.93 

X7xa 

13.31 

1757 

...  14.87 

i8oa 

I5a6 

1847-.. 

IS 

80 

1893 

33.73 

X7X3 

15.34 

1758 

...  14.8s 

1803 

15.41 

1848... 

IS 

8S 

1893.... 

36.49 

I7M 

15.13 

1759 

...  14IS 

1804 

15.41 

1849... 

IS 

78 

1894 

33.56 

171S 

15. II 

1760 

...  1414 

1805 

15.79 

1850... 

IS 

70 

1895.... 

31  .60 

i7xS 

15.09 

1761 

...  14.54 

1806.... 

iS.5a 

1851... 

IS 

46 

1896 

30.66 

1717 

17x1 

15.13 

176a 

...  15.37 

1807 

IS -43 

185a  .. 

.  IS 

59 

1897-.. . 

34.30 

15.11 

1763 

...  14.99 

1808.... 

16.08 

1853... 

IS 

33 

1898 

35  03 

171O 

15.09 

1764 

...  14.70 

1809 

15-96 

1854... 

.  15 

33 

1899-. • • 

34.36 

i7ao 

15.04 

1765 

...  14.83 

1810 

15-77 

1855-.. 

IS 

38 

1900 

33-33 

X7»i 

150S 

1766 

...  14.80 

1811 

15-53 

1856... 

IS 

38 

1901. . . . 

34-68 

X7*a 

X5.17 

1767 

...  14.85 

1813 

16.11 

1857... 

15 

37 

1903 

39-15 

X7a3 

XS.20 

1768 

...  14.80 

1813 

16. as 

1858... 

IS 

38 

1903...- 

38.10 

17*4 

1511 

1769 

...  14.72 

1814 

15-04 

1959-.. 

IS 

19 

1904 

35.70 

X73S 

15. II 

1770 

...  14.63 

181S 

15-36 

i860... 

■  IS 

29 

190S-.-- 

33.87 

X7a6 

15.15 

1771 

...  14.66 

1816.... 

i5-a8 

1861... 

.  15 

SO 

1906. . . . 

30.54 

X7«7 

15.34 

1773 

...  14.5a 

1817 

15-11 

i86a... 

•  15 

35 

1907 

31.  a4 

X7a8 

15.11 

1773 

...  14.6a 

1818.... 

15-35 

1863... 

.  IS 

37 

1908 

38.64 

X7a9 

14.93 

1774 

..   14.63 

1819 

15-33 

1864... 

IS 

37 

1909 

39.74 

X730 

X4.81 

1775 

...  14.73 

1820 

15.63 

186s... 

.  IS 

44 

1910. . . . 

38.33 

I73X 

14.94 

1776 

...  14.5s 

1821 

»5.9S 

1866... 

•  15-43 

1911 

38.33 

•  From  Circular  No.  $2,  United  States  Treasury  Department  (1913),  p.  75. 


MONEY  AND  PRICES 


463 


135.    GRESHAM'S  LAW:  FRENCH  COINAGE,  181 7-1869' 


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In  the  upper  diagram  the  continuous  line  shows  the  annual  coinage  of  gold, 
in  millions  of  francs;  the  dotted  line  shows  the  annual  coinage  of  silver,  in  millions 
of  francs.  The  curve  in  the  lower  diagram  indicates  the  course  of  fluctuations  in 
the  market  ratio  of  silver  to  gold.  The  mint  ratio  was  maintained  during  the  whole 
period  at  15I  to  i. 


'  Diagram  plotted  from  data  given  by  J.  Laurence  LaughUn,  History  of  Bimetal- 
lism in  the  United  States,  4th  ed.,  pp.  340-41.    D.  Appleton  &  Co.,  1900. 


464  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

136.     INCREASE   IN   THE   WORLD'S   PRODUCTION   OF   GOLD, 

1800-1906' 

The  rapid  increase  in  the  annual  production  of  gold  of  the  world  is 
a  feature  which  has  been  the  subject  of  much  discussion  in  its  relation 
to  the  monetary  systems  and  financial  afifairs  generally.  The  facts 
are  best  brought  out  in  the  accompanying  diagram.  California  and 
Australia  in  the  early  fifties  brought  the  production  rapidly  to  $180,- 
000,000  from  about  $10,000,000  in  1830.  The  output  in  the  earlier 
part  of  the  century  was  largely  derived  from  Russia.  The  gradual 
decay  of  placer  mining  in  California  and  Australia  reduced  the  yield 
for  the  world  to  nearly  $100,000,000  about  1886.  In  the  period  from 
1885  to  1890  numerous  discoveries  in  South  Africa,  in  Western  Aus- 
tralia, and  in  Colorado  changed  the  aspect  of  the  industry. 

The  cyanide  process,  which  gave  better  extraction  at  reduced  cost, 
was  introduced  about  this  time.  In  South  Africa  especially  this  pro- 
cess has  proved  of  the  utmost  importance.  A  little  later  discoveries 
were  made  in  Alaska,  Nevada,  the  Canadian  Yukon,  Mexico,  Rhodesia, 
and  West  Africa,  notwithstanding  the  assertion  made  by  many  that 
no  further  important  supplies  of  gold  were  likely  to  be  found. 

Thus,  smce  1887  the  production  of  the  world  has  been  trending 
upward,  except  for  the  temporary  decline  due  to  the  Boer  War,  and  in 
1907  was  about  $412,000,000.  It  will  be  observed  that  Africa  now 
(1907)  contributes  about  $151,000,000  or  one-third  of  the  world's 
production,  and  of  the  African  output  about  $133,000,000  comes  from 
a  small  district  in  the  Transvaal. 

Barring  new  and  unexpected  discoveries  it  is  believed  that  the 
world's  production  will  not  increase  hereafter  at  the  recent  rapid 
rate  of  advance.  It  is  believed  that  the  maximum  production  has 
nearly  been  reached  in  the  Transvaal,  although  the  present  output  can 
be  maintained  for  a  long  time,  probably  for  more  than  thirty  years. 
The  output  of  Australia  from  present  indications  is  more  apt  to 
decline  than  to  increase. 

As  indicated  by  the  diagram,  the  production  of  Russia  forms  a 
solid  and  constant  substratum  on  the  permanence  of  which  it  is  fair 
to  rely.  A  continued  increase  in  the  United  States  is  scarcely  to  be 
expected,  although  the  recent  history  of  gold  mining  in  Nevada 

'  Adapted  from  the  Report  of  the  National  Conservation  Commission  (1909),  III, 
526-27. 


MONEY  AND  PRICES 


465 


shows  what  unsuspected  riches  may  lie  for  decades  within  easy  reach. 
It  is  true  that  there  are  large  unprospected  territories  in  South 
America  which  with  developing  lines  of  communication  may  produce 


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much  gold,  but  on  the  whole  the  probabilities  of  the  immediate 
future  are  rather  in  favor  of  maintenance  of  the  present  level  of 
output  than  of  a  further  sensational  advance. 


466  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

137.    THE  INCREASED  COST  OF  LIVING' 
Tabular  Outline  of  Factors  That  Determine  the  Cost  of  Living 

I.    Cost  of  living  includes: 

1.  Economic  expenditures,  or  such  as  contribute  to  efficiency. 

2.  Uneconomic  expenditures,  or  such  as  do  not  contribute  to  efficiency. 
The  chief  items  of  expenditure  in  the  first  class  are: 

a.  Rent. 

b.  Food. 

c.  Clothing. 

d.  Fuel  and  light. 

e.  Sundries,  including  outlay  for  health,  recreation,  amusement, 
education,  religion,  and  government 

The  second  class  includes: 

A.  Individual  wastage, 
c.  Drink. 

h.  Luxury. 

c.  Amusement. 

d.  Domestic  waste. 

B.  Social  wastage. 
a.  War. 

h.  Governmental  extravagance. 

c.   Crime,  pauperism,   insanity,  accident,  disease,  unemploy- 
ment, and  the  like. 

II.    The  cost  of  living  should  be  considered  not  only  absolutely,  as  above, 
but  relatively,  as  shown  by  proportion  of  expenditures  to  incomes: 

a.  Wages.     \ 

b.  Salaries,   f  \  e.  Leisure. 

c.  Profits.     I  (/.  Idleness. 

d.  Interest.  / 

III.  The  prices  of  commodities  and  services  that  constitute  the  items  of 
expenditure,  classified  above,  are  determined  by  supply,  by  demand 
and  by  value  of  money. 
I.  Supply  depends  on  expenses  of  production. 

a.  Natural  resources  and  marginal  productivity  of  land. 

b.  Ordinary  competitive  expenses: 
(i)  Interest  on  capital. 

(2)  Profits  of  management. 

(3)  Cost  of  labor,  as  determined  by  wages,  hours  and  efficiency. 

■  Adapted  from  the  Report  of  the  [Massachusetts]  Commission  on  the  Cost  oj 
Living  (1910),  PP-  193-97.  635-36,  529-31- 


MONEY  AND  PRICES  467 

c.  Eflfects  of  legislation: 
(i)  Sanitary  laws, 

(2)  Food  laws. 

(3)  Labor  laws. 

(4)  Tariff  laws. 

i.  Effects  of  combination: 

(i)  Capital — trusts. 

(2)  Labor — ^unions. 
t.  Effects  of  wastage: 

(i)  Public  and  private  extravagance. 

(2)  Planless  and  wasteful  methods  of  production  and  distribu- 
tion. 
/.  Effects  of  improvements  and  inventions. 

2.  Demand  depends  on: 

a.  Size  and  growth  of  population,  as  governed  by  birth  rate,  death 

rate,  immigration. 
h.  Amount  of  incomes. 
c.  Standard  of  living,  as  influenced  by  advance  of  culture,  growth 

of  cities,  custom  and  fashion,  habits  of  spending  and  saving. 

3.  Value  of  money  depends  on: 
a.  Supply  of  gold. 

h.  Currency  system. 
c.  Use  of  credit. 

CAUSES   OF   INCREASE   OF   COST   OF   LIVING 

On  the  basis  of  the  foregoing  analysis  of  the  factors  that  enter 
into  the  determination  of  the  cost  of  living,  we  may  proceed  to 
classify  the  causes  that  have  brought  about  the  recent  advance  of 
prices.  These  causes  fall  into  two  main  groups:  First,  increase  of 
uneconomic  expenditures,  through  waste,  destruction,  and  general 
extravagance;  second,  increase  of  economic  expenditures,  brought 
about  by  rise  of  prices. 

The  chief  items  in  the  increase  of  uneconomic  expenditures  are 
enlarged  outlay  for  war  and  national  armaments,  higher  scale  of 
governmental  expenditure  in  general,  and  cost  of  the  burden  of  crime, 
pauperism,  insanity,  accident,  disease,  imemplo)anentj  and  other 
forms  of  social  wastage.  These  are  all  items  of  public  and  social 
expenditure.  Meanwhile,  also,  individual  expenditure  of  an  uneco- 
nomic character  has  increased,  including  outlay  for  drink,  luxury, 
amusement,  and  wastefvd  or  injurious  forms  of  consumption. 

The  factors  that  have  contributed  to  bring  about  an  advance  of 
prices,  and  a  consequent  expansion  of  necessary  expenditure,  fall  into 


468  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

three  main  groups:  influences  affecting  the  supply  of  commodities 
and  services;  changes  in  the  demand  of  consumers;  and  fall  of  the 
value  of  money.  Obviously,  there  are  only  three  ways  in  which  any 
particular  influence  can  operate  to  bring  about  an  advance  of  prices: 
it  must  either  affect  supply,  restricting  it  or  making  production  more 
expensive;  or  it  must  act  upon  demand,  extending  the  consumption 
of  goods;  or  it  must  alter  the  money  standard  in  which  values  are 
measured  and  prices  are  expressed,  causing  it  to  depreciate.  During 
the  last  decade  a  variety  of  forces  have  worked  upon  prices  through 
these  three  channels,  tending  to  diminish  supply,  to  increase  demand 
and  to  reduce  the  value  of  money.  The  resultant  of  these  combined 
influences  is  expressed  in  the  higher  index  numbers  of  general  prices 
in  all  countries  of  the  world. 

The  main  influences  that  have  worked  to  restrict  supply  are  the 
drain  of  population  from  the  land,  resulting  in  decreasing  the  propor- 
tion of  persons  engaged  in  agricultural  production;  the  exhaustion  of 
natural  resources,  resulting  in  increasing  expenses  of  production  or 
diminishing  returns  to  capital  and  labor;  and  wasteful  methods  of 
production  and  distribution,  especially  the  latter.  Of  particular 
importance  in  the  field  of  economic  waste  are  needless  multipHcation 
of  middlemen  and  of  charges  in  the  passage  of  commodities  from  the 
source  of  supply  to  the  door  of  the  consumer;  excessive  expenditure 
for  advertising  purposes;  adulteration  and  debasement  of  quality; 
and  distribution  of  foods  in  packages,  involving  in  many  cases  short 
weight  and  high  cost.  The  influence  of  the  tariff,  that  of  the  trusts, 
and  that  of  the  labor  unions  must  be  considered  here  as  possible 
factors  in  the  advance  of  prices.  Also,  the  development  of  legislation 
for  the  control  of  production  and  distribution,  in  the  shape  of  sanitary 
requirements,  pure  food  laws,  and  labor  codes  is  a  factor  of  consider- 
able importance. 

The  changes  in  reference  to  demand  have  come  about  through 
the  growth  and  concentration  of  the  population  in  cities,  the  general 
advance  of  the  standard  of  living,  bringing  larger  requirements  on  the 
part  of  the  individual  consumer,  and  the  national  tendency  toward 
extravagant  expenditure.  The  last  influence  works  in  two  ways  to 
advance  prices:  it  not  only  increases  demand,  but  it  also  reduces 
supply,  through  the  total  destruction  or  partial  utilization  of  goods. 

Finally,  the  fall  in  the  value  of  money  has  been  brought  about  by 
the  great  increase  of  the  gold  supply,  the  inflation  of  the  currency 
through  the  issue  of  paper  money  in  various  forms,  and  the  extension 


MONEY  AND  PRICES  469 

of  credit  in  general.  As  the  supply  of  money  increases,  the  value  of 
the  unit  or  standard  must  fall,  other  things  being  equal.  In  other 
words,  the  measure  of  value  shrinks  as  the  money  commodity  becomes 
more  abundant,  and  the  result  is  expressed  in  advanced  prices.  The 
extension  of  credit  operates  to  diminish  the  demand  for  gold,  and  in 
some  cases  to  increase  the  utility  or  effectiveness  of  the  money  supply, 
tending  thus  to  reduce  its  value  in  two  ways.  Apart  from  the  general 
influence  of  the  enlarged  supply  of  money  in  raising  prices,  an  increase 
of  the  gold  supply  works  upon  prices  in  a  very  direct  and  potent  way. 
The  gold  is  exchanged  for  certificates,  and  the  certificates  are  deposited 
in  banks,  becoming  reserves.  On  the  basis  of  these  reserves  the  banks 
extend  their  loans,  money  becomes  easy,  business  is  stimulated,  and 
prices  are  affected  immediately  and  powerfully. 

The  classification  of  the  causes  of  the  increased  cost  of  living  thus 
presented  may  be  outlined  in  tabular  form  as  follows: 

I.   Increase  of  uneconomic  expenditures: 

1.  Social  wastage. 

a.  War  and  national  armaments. 

h.  Higher  scale  of  governmental  expenditure. 

c.  Increasing  cost  of  burden  of  crime,  pauperism,  insanity,  accident, 
disease,  unemployment  and  the  like. 

2.  Individual  wastage, 
o.  Drink. 

b.  Luxury. 

c.  Amusement. 

d.  Domestic  waste. 

II.   Increase  of  economic  expenditures  in  consequence  of  higher  prices. 
The  causes  of  the  advance  of  prices  may  be  classed  as: 
I.  Changes  in  supply. 

o.  Drain  of  population  from  the  land. 

b.  Exhaustion  of  natural  resources. 

c.  Wasteful  methods  of  production  and  distribution, 
(i)  Transportation. 

(2)  Wholesale  and  retail  costs. 

(3)  Advertising. 

(4)  Adulteration, 
(s)  Package  foods. 

d.  Tariff. 

e.  Trusts. 

/.  Labor  unions, 
g.  Legislation. 

(i)  Sanitary  laws. 
^    (2)  Pure  food  laws. 

(3)  Labor  laws. 


470 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


2.  Changes  in  demand. 

a.  Growth  and  urban  concentration  of  population. 

b.  General  advance  of  standard  of  living. 

c.  Extravagance  in  expenditure. 

3.  Changes  in  value  of  money, 
c.  Increase  of  gold  supply. 

b.  Inflation  of  currency. 

c.  Extension  of  credit. 

ANALYSIS   OF   CURRENT   EXPLANATIONS   OF   HIGH   PRICES 

The  causes  of  the  recent  advance  of  prices  have  been  discussed 
by  economists  and  expert  observers  in  various  articles  in  the  maga- 
zines and  reviews  of  the  last  six  months.  The  contributions  to  this 
discussion  are  marked  by  a  wide  variety  of  opinion.  There  is,  how- 
ever, a  striking  consensus  of  opniion  regarding  one  cause  of  the 
upward  price  movement,  namely,  the  increased  production  of  gold. 
The  following  table  presents  an  analysis  of  the  causes  assigned  for 
the  increase  of  prices  by  the  writers  of  thirty  articles  that  have 
appeared  in  print  since  January  i,  1910: 


Causes 


Contributory 
Cause 


1 .  Increase  of  gold  supply 

2.  Exhaustion  of  natural  resources 

3.  Rising  standard  of  living 

4.  Withdrawal  of  population  from  agriculture,  and 

growth  of  cities 

5.  Trusts  and  combinations 

6.  Tariff 

7.  Labor  unions 

8.  Growth  of  population,  and  unscientific  methods 

of  farming 

9.  Extravagance  in  expenditure 

10.  Waste  and  fraud  in  distribution 

1 1 .  Uneconomical  marketing  and  housekeeping .... 

12.  Speculation 

13.  Immigration 


4 
8 

3 

I 

10 

7 
3 

4 
6 

5 
3 
3 

2 


The  figure  given  in  the  first  column  of  the  table,  under  the  head 
"Principal  Cause,"  indicates  the  number  of  writers  who  assign  the 
chief  importance  to  the  factor  in  question;  that  given  in  the  second 
column,  "Contributory  Cause,"  shows  the  number  who  regard  the 
bfluence  of  the  cause  enumerated  as  secondary.  It  appears  that  17 
out  of  the  30  writers  attribute  the  advance  of  prices  mainly  to  the 
increase  of  the  gold  supply;  4  others  regard  this  cause  as  of  secondary 
importance.     Exhaustion  of  natural  resources,  resulting  in  dimin- 


MONEY  AND  PRICES  471 

ished  returns  from  agriculture,  increased  expenses  of  production  and 
pressure  of  population  on  the  land,  is  given  the  first  place  by  4  writers; 
8  others  ascribe  secondary  importance  to  this  factor.  A  rising 
standard  of  living  is  believed  to  be  the  primary  cause  of  higher  prices 
by  2  of  the  contributors  to  the  recent  discussion;  3  others  assign  some 
weight  to  this  influence.  Withdrawal  of  population  from  agriculture, 
and  growth  of  the  cities,  which  are  both  consequences  of  the  concen- 
tration of  population,  are  regarded  as  the  main  factor  by  only  2 
writers,  and  as  a  secondary  cause  by  i.  The  growth  of  population 
in  general,  combined  with  unscientific  methods  of  agriculture,  result- 
ing in  disproportion  between  the  population  and  the  food  supply,  is 
selected  as  the  first  cause  by  i  observer;  this  cause  is  given  secondary 
importance  by  4  others.  Two  writers  place  the  responsibility  chiefly 
upon  trusts  and  combinations,  and  10  others  assign  more  or  less 
importance  to  this  cause.  The  tariff  is  assigned  as  the  primary 
cause  by  only  i  writer,  but  is  held  to  be  a  contributory  influence  by 
7  others.  Similarly,  the  influence  of  labor  unions  is  declared  to  be 
the  chief  cause  by  i  person,  and  is  mentioned  also  by  3  others.  The 
foregoing  are  the  only  influences  that  are  regarded  as  chief  factors  in 
the  advance  of  prices;  the  others  are  regarded  by  all  the  writers  as 
of  secondary  importance,  in  varying  degrees. 

FINDINGS    OF   THE    COMMISSION 

The  findings  of  the  commission  with  regard  to  the  causes  of  the 
recent  advance  of  prices  are  as  follows: 

1.  The  primary  cause  of  the  world-wide  advance  of  prices  since 
1897  is  the  increase  of  the  gold  supply,  which  has  reduced  the  pur- 
chasing power  of  money  and  brought  about  a  corresponding  increase 
of  values  measured  in  money  in  all  the  leading  commercial  states,  and 
at  least  in  the  United  States  has  served  as  the  basis  for  a  vast  exten- 
sion of  credit. 

2.  The  advance  of  prices  in  the  United  States  has  been  accelerated 
greatly  by  the  enormous  waste  of  income,  through  uneconomic 
expenditure  for  war  and  national  armament  and  through  multiple 
forms  of  extravagance,  both  public  and  private,  and  of  wastage,  both 
individual  and  social.  The  increasing  burden  of  disease,  accident, 
crime,  and  pauperism  imposed  upon  society,  and  the  loss  through 
expenditure  on  a  rising  scale  for  luxuries  and  through  wasteful  methods 
of  management  in  the  household,  have  been  potent  contributing 
factors  to  the  advance  of  the  cost  of  living. 


473  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

3.  The  advance  of  prices  has  been  further  promoted  by  a  com- 
plexity of  causes,  operating  on  the  side  of  supply  to  reduce  the  volume 
and  increase  the  expenses  of  production,  and  on  the  side  of  demand 
to  extend  and  diversify  the  consumption  of  commodities.  The  main 
factors  in  restricting  supply  and  enhancing  the  cost  of  commodities 
are  the  drain  of  population  from  the  land,  which  has  decreased  the 
proportion  of  persons  engaged  in  producing  the  food  supply;  the 
exhaustion  of  natural  resources,  which  has  resulted  in  increased 
expenses  of  production  or  diminished  returns  from  the  soil;  and 
uneconomic  methods  of  production  and  distribution,  especially  the 
latter.  The  chief  influences  on  the  side  of  demand  which  have 
worked  parallel  to  the  forces  affecting  supply  are  the  growing  con- 
centration of  population  in  great  cities,  which  has  increased  the  pro- 
portion of  nonproducing  food  consumers;  the  general  advance  of  the 
standard  of  living,  which  has  enlarged  the  requirements  on  the  part 
of  individual  consumers  of  all  classes;  and  the  national  habit  of 
extravagance,  which  has  further  extended  and  diversified  the  demand 
for  comforts  and  luxuries  created  by  the  advance  of  the  standard  of 
living. 

4.  With  regard  to  the  tariff,  the  trusts  and  the  unions,  which 
have  been  declared  to  be  either  primary  or  contributory  causes  of 
the  high  cost  of  living,  the  commission  finds  that  none  of  these 
factors  can  be  regarded  as  a  direct  and  active  cause  of  the  recent 
increase  of  prices. 

With  regard  to  the  tariff,  the  facts  that  prices  have  fallen  and 
risen  durmg  long  periods  without  relation  to  changes  in  duties;  that 
prices  have  been  rising  in  Great  Britain,  under  free  trade;  and  that 
large  increases  have  taken  place  in  the  prices  of  commodities  not 
appreciably  affected  by  the  tariff,  show  conclusively  that  the  tariff  is 
not  a  factor  in  the  recent  upward  movement  of  prices  in  this  country. 
On  the  other  hand,  however,  it  is  clear  that  in  a  period  of  rising  prices 
like  the  present  the  tariff  cuts  oflf  possible  relief  to  consumers  by  closing 
access  to  the  cheapest  sources  of  supply  in  the  world's  markets.  In 
the  past  the  duties  on  the  necessities  of  common  consumption,  food 
stuffs,  have  been  largely  inoperative,  because  the  country  produced 
not  only  its  own  food  supply,  but  a  large  surplus  for  exportation. 
The  United  States  appears,  however,  to  be  approaching  rapidly  the 
turning  point,  when  it  will  become,  instead  of  a  food-exporting,  a 
food-importing  country.  Under  these  conditions,  as  the  duties  on 
food  stuffs  become  actually  operative,  their  effect  must  be  to  increase 


MONEY  AND  PRICES  473 

the  cost  of  living  to  wage  earners  and  the  expenses  of  production  ta 
manufacturers,  thus  hampering  the  development  of  industry  and 
defeating  the  very  purpose  of  the  protective  policy.  The  commission 
is  therefore  of  the  opinion  that  when  the  tariff  shall  further  be  revised, 
the  expediency  of  removing  all  duties  on  food  products  should  be 
considered  carefully  by  the  national  Congress;  and  it  hopes  that  the 
tariff  commission  will  be  equipped  with  such  funds  and  powers  as  may 
be  necessary  for  researches  adequate  as  a  basis  for  future  changes, 
to  be  fovmded  on  commercial  rather  than  political  considerations. 

With  reference  to  the  trusts,  the  facts  that  the  prices  of  trust- 
controlled  commodities  have  not  risen  conspicuously;  that  prices  have 
advanced  in  other  countries  in  which  trusts  have  not  developed  on  the 
American  scale;  and  that  the  higher  prices  of  food  products,  includ- 
ing meat,  are  accounted  for  by  natural  causes  and  are  not  to  be 
attributed  to  combination  in  any  considerable  degree,  indicate  that 
the  trusts  cannot  be  held  responsible  for  the  late  great  advance  of 
prices.  On  the  other  hand,  however,  combination  undoubtedly 
enables  a  group  of  producers  to  take  advantage  of  any  conditions  that 
may  tend  to  advance  prices  and  to  maintain  a  high  price  level  once 
established.  Under  existing  conditions,  constant  vigilance  with 
reference  to  the  action  of  combinations,  especially  those  dealing  with 
the  necessities  of  life,  is  doubly  incumbent  on  all  officials  intrusted 
with  the  enforcement  of  laws  against  monopoly  and  combined  regu- 
lation of  prices. 

Concerning  the  labor  unions,  the  facts  that  less  than  10  per  cent 
of  the  workers  of  the  country  are  organized;  that  the  workers  engaged 
in  the  production  of  the  commodities  that  have  risen  most  notably 
in  price,  especially  food  stuffs,  are  hardly  organized  at  all;  and  that 
wages  have  risen  in  less  degree  and  at  slower  pace  than  the  prices  of 
commodities,  the  wage  advance  beginning  some  time  after  the  price 
advance,  prove  that  the  recent  increase  of  prices  cannot  be  attributed 
to  the  influence  of  trade  unions.  Concerning  the  deeper  question  of 
the  general  influence  of  reduction  of  hours,  increase  of  wages  and 
trade  union  policies  upon  expenses  of  production,  prices  and  cost  of 
living,  the  commission  expresses  no  opinion,  on  account  of  the  impos- 
sibility of  determining  the  exact  facts  required  for  an  impartial  answer 
to  this  question  within  the  time  allowed  for  its  investigation. 


474  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

138.    THE  CORRECTION  OF  PRICE-CHANGES' 

Historical  attempts  to  correct  price  changes  may  be  grouped  into 
four  classes.  First  are  the  well-known  instances  of  efforts  of  the 
authorities  in  almost  every  country  to  fix  the  prices  of  staple  products. 

The  second  method  to  which  resort  has  been  had  for  preventing 
the  alleged  loss  from  price  changes  is  the  attempt  to  find  an  ideal  or 
unvar}ang  standard.  Accounts  of  this  are  to  be  found  in  theoretical 
literature  rather  than  in  legislation  or  social  programs. 

The  third  class  of  proposals  includes  those  which  would  change 
the  money  supply  without  statistical  information  indicating  the 
amount  of  change  needed,  or  the  degree  of  rapidity  with  which 
it  should  proceed.  The  most  important  of  these  proposals  is  bimet- 
allism. 

The  fourth  method,  known  as  the  tabular  standard,  is  that  which 
attempts  to  determine  the  change  in  the  average  of  prices  and  to  pay 
in  money  in  amounts  proportionate  to  the  degree  of  this  change.  A 
variation  of  this  fourth  method  is  proposed  by  Professor  Irving  Fisher. 
He  would  regulate  the  price  average  by  controlling  the  money  supply 
through  a  seigniorage  charge  determined  by  the  tabular  standard. 
This  is  really  an  indirect  way  of  applying  the  tabular  standard. 

139.    A  COMPENSATED  DOLLAR' 

The  following  plan,  which  may  be  called  "the  adjustable  seign- 
iorage plan,"  is  an  attempt  to  make  the  purchasing  power  of  the 
dollar  constant.  We  have  at  present  a  gold  dollar  of  constant  weight, 
but  of  varying  purchasing  power.  We  need  a  dollar  of  constant 
purchasing  power  and  varying  weight. 

The  present  proposal  is  to  increase  and  vary,  from  time  to  time, 
tKe  weight  of  the  bullion  dollar,^  without  necessarily  disturbing  the 
weight  of  the  coined  dollar.  Suppose,  for  instance,  that  the  bullion 
dollar  had  been  gradually  increased  since  1896  until  today  it  were  50 
per  cent  heavier,  or  38 . 7  grains,  while  the  coined  dollar  were  still  25 . 8 
grains.    This  means  that  the  government  would  redeem  on  demand 

'  Adapted  from  David  Kinley,  "Objections  to  a  Monetary  Standard  Based  on 
Index  Numbers,"  in  the  American  Economic  Review,  III,  2  (March,  1913). 

•  Adapted  from  various  writings  of  Irving  Fisher. 

» "Bullion  dollar  "  means  the  weight  of  bullion  which  the  owner  of  gold  coin  can 
get  for  it  by  redemption. 


MONEY  AND  PRICES  475 

each  coined  gold  dollar  in  38.7  grains  of  gold  bullion.  Gold  dollars 
would  then  be  mere  tokens — like  brass  checks — entitling  the  holder 
to  gold  bullion  just  as  our  gold  certificates  now  entitle  the  holder  to 
so  much  gold  (coin  or  bullion)  in  the  United  States  Treasury.  As  to 
convertibility  in  the  other  direction,  the  government  mint  would 
stand  ready  to  give  back  a  coined  gold  dollar  for  each  38 . 7  grains  of 
biillion  plus  a  slight  coinage  fee  or  "  brassage  "  of,  say,  i  per  cent.  This 
brassage  charge  would  serve,  as  afterward  explained,  to  prevent  loss  to 
the  government  by  speculation.  If  i  per  cent,  it  would  be  0.387 
grains,  to  be  added  to  the  38.7,  making  39.087  grains  in  all  as  the 
bullion  required  at  the  mint  to  secure  a  "coined  dollar." 

The  difference  between  the  bullion  required  by  the  mint  (39.087 
grains)  and  the  coin  dollar  (25.8  grains)  is  13.287  grains  and  would 
be  retained  by  the  government  to  strengthen  its  bullion  reserve  for 
redeeming  gold  coin.  Of  this  13.287  only  0.387  is  brassage;  the 
remainder,  12.9  grains,  may  for  distinction  of  terms  be  called  seign- 
iorage. Thus  in  weight  the  bullion  dollar  is  the  coin  dollar  plus 
seigniorage  and  the  bullion  required  by  the  mint  is  the  amount  of 
this  bullion  dollar  plus  "brassage." 

An  obvious  proviso  in  the  proposed  plan  would  be  that  the  bullion 
dollar  must  never  be  lighter  than  the  coin  dollar.  The  present  indi- 
cations are  that  the  dollar,  in  order  to  maintain  the  same  purchasing 
power,  will  need  in  general  to  increase;  for  further  depreciation  of 
gold  seems  probable.  If,  however,  it  should  ever  happen  that  the 
proposed  bullion  dollar  should  shrink  in  weight  again  to  25.8  grains, 
then  the  proviso  that  it  should  never  shrink  lower  would  come  into 
operation.  It  would  then  have  to  remain  25.8  fntil  the  weight 
required  for  the  bullion  dollar  should  again  rise  above  25.8  grains. 
So  long  as  it  remained  25.8  grains  it  would  cease  to  be  adjustable 
and  to  maintain  a  constant  purchasing  power.  We  should,  during  this 
period,  simply  be  in  the  same  condition  that  we  are  in  at  present. 

With  a  coin  dollar  weighing  25.8  grains  and  with  the  bullion 
dollar  never  lighter  than  25.8  grains,  the  price  of  gold  bullion  can 
never  be  higher  than  $18.60.  But  this  limit  or  barrier  can  at  any 
time  be  made  to  recede  simply  by  reducing  the  weight  of  the  coin 
dollar  through  recoinage.  It  might  even  be  advisable,  in  order  to 
secure  a  wide  margin  between  the  coin  and  the  bullion  dollar,  to  begin 
the  new  system  by  recoining  at  the  outset  all  present  gold  coin  into 
coins  of  less  weight,  the  government  keeping  the  difference  as  a  reserve 
to  help  create  its  bullion  reserve  needed  for  operating  the  proposed 


476  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

system.    This   would,    incidentally,   have   the   fiscal    advantage   of 
saving  the  expense  of  creating  such  a  reserve  by  taxation  or  loans. 

We  come  now  to  another  important  restriction  on  changes  in  the 
weight  of  the  bullion  dollar  which  should  be  imposed  in  order  to  pre- 
vent speculation  embarrassing  to  the  government.  This  restriction 
is  that  no  single  shift  in  the  bullion  dollar  may  exceed  the  extent  of 
the  brassage.  That  is,  if  the  brassage  is  i  per  cent,  no  one  shift  shall 
exceed  i  per  cent. 

If  this  were  not  provided  but  the  bullion  dollar  should  at  any  time 
be  raised  more  than  i  per  cent,  if,  e.g.,  the  shift  was  from  a  bullion 
dollar  of  38.7  grains  to  40  grains  (and  from  a  quantum  of  bullion 
required  by  the  mint  of  39.087  grains  to  40.40  grains),  the  govern- 
ment might  be  embarrassed  by  speculation.  The  new  pair  of  figures 
(40  and  40 .  40)  would  both  be  above  the  range  of  the  old  pair  (38 . 7 
and  39 .  087) ;  that  is,  the  lower  (40)  of  the  new  pair  would  be  higher 
than  the  higher  (39.087)  of  the  old  pair.  When  it  was  known  or 
expected  that  these  changes  were  to  be  made  on  a  certain  date, 
speculators  would  hurry  bullion  to  the  mint  in  advance  of  that  date 
and  for  each  39 .  087  grains  receive  a  coin  dollar.  With  this  dollar 
they  could,  as  soon  as  the  set  date  arrived,  return  and  demand  redemp- 
tion in  40  grains.  Thus  they  would  win  over  night  40—39.087,  or 
0.913  grains  on  each  39.087  grains  originally  held.  Again,  if  the 
bullion  dollar  were  changed  too  much  at  any  time  in  the  opposite 
direction  as,  say,  from  38.7  grains  to  37  graiiis,  owners  of  gold  coin 
could  get  it  redeemed  in  bullion  at  the  old  rate  today  and  mint  this 
bullion  at  the  new  rate  tomorrow.  Each  coin  dollar  they  could 
redeem  today  ifl  38.7  grains  of  gold  bullion  and  tomorrow  under  the 
new  arrangement  they  could  get  a  dollar  from  the  mint  for  only  37 
grains  plus  i  per  cent  brassage,  or  37.37  grains,  still  leaving  38.7  — 
37.37  grains  or  0.33  grains  of  bullion  for  overnight  profit  on  each 
original  dollar  invested  in  the  speculation. 

But  if  the  permissible  shift  in  weight  of  the  bullion  dollar  were 
not  over  i  per  cent  in  either  direction,  no  such  profit  would  be  possible. 
The  restriction  in  the  shift  to  i  per  cent  at  a  time  is  ample  to  permit 
of  all  the  movement  ordinarily  required,  provided  the  shift  is  made 
often  enough.  It  might  be  monthly,  or  12  per  cent  per  annum;  it 
might  be  bimonthly,  or  6  per  cent  per  annum;  it  might  be  quarterly, 
or  4  per  cent  per  annum.  Moreover,  the  margin  for  each  shift  might 
be  narrowed  or  widened  by  making  the  brassage  three-fourths  of  i  per 
cent  or  less,  or  i^  per  cent  or  more. 


MONEY  AND  PRICES 


477 


One  important  question  remains :  How  can  we  know  what  changes 
to  make  from  time  to  time  in  the  weight  of  the  bullion  dollar  ?  The 
answer  is:  By  index  numbers  of  prices,  such  as  those  of  the  United 
States  Bureau  of  Labor,  Bradstreet,  Gibson,  Sauerbeck,  The  Econo- 
mist, or  the  British  Board  of  Trade.  Any  of  these  would  afford  a 
good  guide  and  they  all  agree  fairly  well. 


HH         »»        W       f***. 


tijDam 


When  once  a  system  of  index  numbers  is  fixed  upon,  their  numeri- 
cal calculation  becomes  a  mere  matter  of  clerical  arithmetic.  If  th^ 
official  index  number  should  show  the  price  level  to  be,  say,  one-half 
of  I  per  cent  above  the  base  level  from  which  the  system  started,  it 
would  become  mandatory  to  increase  the  gold  bullion  dollar  by  one- 
half  of  I  per  cent  (i.  e.,  to  decrease  the  bullion  prices  by  one-half  of  i 
per  cent),  and  so  on  for  any  increase  or  decrease — subject,  of  course, 
to  the  restrictions  above  imposed.  Thus  if  the  price  level  were  i  per 
cent  below  normal,  the  bullion  dollar  could  be  reduced  by  only  i  per 
cent  in  any  one  quarter  of  the  year;  but  the  fuU  correction  could  be 
reached  in  three  quarters  unless  the  deviation  were  aggravated  in  the 
meantime;  and  in  that  case  the  correction  would  follow  steadily  on 
the  heels  of  the  deviation.  Except  in  paper  money  times  there 
never  was,  I  think,  a  historical  case  of  a  persistent  rise  of  prices  over 
any  large  part  of  the  world  as  great  as  i  per  cent  a  quarter  or  4  per 
cent  a  year  for  more  than  two  or  three  years,  while  the  falls  of 
prices  have  been  still  less  violent,  excepting  after  crises.    Under  the 


478  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

system  here  proposed  there  would  be  little  opportunity  for  crises  to 
incubate. 

The  plan  then  in  brief  is: 

1.  To  institute  an  official  index  number  of  prices,  selecting  some  initial  year 
as  the  base  of  reference,  the  price  level  for  that  year  being  called  loo  per 
cent. 

2.  The  government  or  governments  thereafter  to  readjust  the  official  weight 
of  the  "bullion  dollar"  (the  quantum  of  bullion  in  which  it  will  redeem 
the  gold  dollar)  at  regular  intervals,  say  monthly,  according  to  the  find- 
ings of  the  index  number.  If  in  any  month  the  index  number  deviates 
from  par,  the  bullion  dollar  is  to  be  corrected  in  proportion  to  the  devia- 
tion, provided,  however, 

o)  that  no  one  shift  in  the  weight  of  the  bullion  dollar  shall  exceed  the 
brassage  (say  i  per  cent)  nor  such  stated  limits  as  will  safeguard  the 
government  from  injurious  speculations  and 

b)  that  the  bullion  dollar  shall  in  no  case  be  of  less  weight  than  the  coin 
dollar. 

3.  The  government  to  be  responsible  at  all  times  for  redeeming  on  demand 
gold  coins  (or  certificates)  in  bullion  dollars  and  for  minting  bullion  at 
the  same  rate  (except  for  the  brassage  of,  say,  i  per  cent) ;  in  other  words, 
the  government  to  be  always  ready  to  sell  gold  bullion  at  the  redemption 
price  and  to  buy  it  at  the  mint-price  (the  redemption-price  less  the 
brassage) . 

In  summary  it  may  be  said  that  the  plan  may  be  called: 

With  respect  to  its  purpose: 
A  plan  to  assimilate  the  gold  standard  to  the  multiple  standard; 
i.e.,  to  convert  the  gold  standard  into  a  true  gold  standard. 
i.e.,  to  make  a  stable  dollar. 

i.e.,  to  standardize  the  dollar  as  a  unit  of  purchasing  power, 
i.e.,  to  change  from  a  gold  dollar  of  constant  weight  and  varying  pur- 
chasing power  to  a  gold  dollar  of  constant  purchasing  power  and 
varying  weight. 
With  respect  to  the  method: 
A  plan  to  make  a  compensated  dollar; 
i.e.,  to  (virtually)  increase  the  weight  of  the  gold  dollar  to  compensate 

for  the  depreciation  of  gold. 
i.e.,  to  change  the  status  of  gold  coins  to  that  of  silver  coins — tokens, 
or  mere  "brass  checks,"  so  to  speak,  entitling  the  holder  to  a  vary- 
ing quantity  of  gold  bullion  which  would  be  the  virtual  dollar, 
i.e.,  to  restore  the  ancient  custom  of  seigniorage,  but  adjusted  accord- 
ing to  index  numbers. 
i.e.,  to  lower  the  mint-price  of  gold  to  keep  pace  with  its  actual  depre- 
ciation. 


MONEY  AND  PRICES  479 

140.    THE  COMPENSATED  DOLLAR:  A  CRITICISM' 

I 

It  must  be  admitted  at  the  outset  that  the  plan,  if  carried  out 
with  iron  consistency  for  a  considerable  stretch  cf  time,  would  achieve 
the  result  mainly  had  in  view — the  prevention  of  a  long-continued 
and  considerable  rise  in  prices.  No  one  who  holds  to  the  doctrine 
that  the  general  range  of  prices  is  determined  by  the  relation  between 
the  quantity  of  commodities  and  the  volume  of  the  circulating 
medium,  and  that  the  volume  of  the  circulating  medium  in  the  end 
depends,  ceteris  paribus,  on  the  amount  of  coined  money,  can  do 
otherwise  than  admit  the  logical  soundness  of  the  scheme. 

More  stress  should  be  laid,  however,  than  Professor  Fisher  does, 
on  the  fact  that  the  plan  can  work  out  its  results  only  through  its 
effects  on  the  quantity  of  coined  gold.  The  connection  between  the 
quantity  of  coined  money  and  general  prices  is  by  no  means  a  close 
one.  It  is  not  only  loose  and  uncertain,  but  we  are  much  in  the 
dark  concerning  the  degree  of  looseness  and  uncertainty.  Economists 
should  be  very  chary  of  prediction  in  such  matters,  and  Professor 
Fisher  makes  predictions  which  the  event  might  greatly  falsify.  It 
seems  to  me  highly  improbable  that  fluctuations  in  prices  would  cease, 
or  that  such  a  smooth  course  would  be  followed  as  is  indicated  on 
Professor  Fisher's  chart.  So  long  as  the  modern  mechanism  of  credit 
continues  to  be  used,  fluctuations  in  prices  seem  to  me  inevitable. 
A  long-continued  considerable  advance  would  alone  be  prevented. 
Commercial  crises  would  not  be  prevented,  nor,  in  my  judgment, 
appreciably  abated.  Professor  Fisher's  predictions  on  this  subject 
rest  upon  the  particular  theory  of  commercial  crises  which  he  has 
developed  elsewhere.  That  theory  does  not  seem  to  me  established, 
and  I  have  little  faith  in  predictions  that  are  based  upon  it.  Nor 
do  I  believe  that  labor  discontent  is  as  closely  connected  with  changes 
in  general  prices  as  Professor  Fisher  intimates. 

II 

What  is  to  be  said  now  of  the  poissbility  of  securing  the  adoption 
of  such  a  plan  ? 

An  international  agreement  for  its  adoption  seems  to  me  in  the 
highest  degree  unlikely.  Let  it  be  recalled  how  repeated  were  the 
endeavors,  under  stress  greater  than  that  felt  in  recent  years,  to  bring 

'  Adapted  from  F.  W.  Taussig,  "The  Plan  for  a  Compensated  Dollar,"  in  The 
Quarterly  Journal  of  Economics,  XXVII,  402-16  (May,  1913). 


48o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

about  an  agreement  for  international  bimetallism.  A  fall  in  general 
prices  and  in  money  incomes  is  a  phenomenon  much  more  unwelcome 
than  a  rise.  The  earlier  fall  in  prices,  moreover,  was  bitterly  felt 
not  only  by  the  debtor  classes,  but  by  all  the  protectionists.  The 
movement  for  international  bimetallism  had  powerful  support  in 
political  circles  as  well  as  among  the  economists.  Yet  it  never  had  a 
ghost  of  a  chance.  So  great  is  the  rivalry  between  nations,  so  intent 
is  each  upon  its  own  advantage,  so  jealous  are  they  of  each  other,  so 
strong  above  all  is  the  spirit  of  selfishness  and  mercantilism  in  their 
economic  policies,  that  it  seems  to  me  hopeless  to  expect  them  to  come 
to  an  understanding  on  a  matter  of  this  sort. 

Even  if,  by  some  unexpected  stroke,  an  international  agreement 
were  to  be  secured,  it  would  rest  upon  the  frailest  basis.  Any  war 
would  put  an  end  to  it.  Any  stage  of  depression  in  an  important 
country  would  render  it  in  the  highest  degree  irksome,  would  lead 
to  its  revocation  by  some  one  country,  and  then  would  cause  the 
whole  structure  to  topple  over.  Not  least,  there  would  be  differences 
concerning  the  index  number  of  prices  to  be  used  in  fixing  the  seign- 
iorage. Prices  do  not  move  parallel  in  different  countries.  It  is 
inevitable  that  they  should  sometimes  rise  in  one  country,  while 
falling  in  another;  or  rise  in  one  more  than  in  another,  or  fall  more. 
Which  country's  index  number  should  govern  ?  If  indeed  all  coun- 
tries were  convinced  that  a  disastrous  depreciation  of  money  were 
impending,  and  if  they  were  resolutely  determined  to  sink  all  differ- 
ences and  all  selfish  interests  in  order  to  prevent  it,  they  might  act 
on  the  basis  of  a  compromise  index  number  settled  by  an  international 
commission.  But  the  mere  mention  of  these  conditions  precedent 
suffices  to  show  how  far  they  are  from  being  present. 

The  question  arises  whether  it  would  be  feasible  for  one  country 
alone  to  adopt  the  plan.*  It  would  be  feasible,  in  the  same  sense 
that  it  would  be  feasible  for  all  countries  together  to  adopt  it.  One 
country  alone,  carrying  it  out  with  unflinching  consistency,  might 
secure  the  desired  result,  subject  to  the  qualifications  which  have 
already  been  indicated.  But  that  any  one  country  would  in  fact 
adopt  it  alone  seems  to  me  in  the  highest  degree  improbable. 

Consider  for  a  moment  the  mode  in  which  the  scheme  would  work 
in  detail  if  adopted  by  a  single  country.    The  immediate  effect  of  a 

*  Professor  Fisher  intimated  in  some  of  his  earlier  writings  on  the  subject  that 
a  single  country  might  adopt  the  plan.  In  later  papers,  however,  he  has  advocated 
it  for  international  adoption  only. 


MONEY  AND  PRICES  481 

seigniorage  would  be,  as  Professor  Fisher  points  out,  a  readjustment 
of  the  par  of  foreign  exchange.  The  exporter  would  find  the  par  of 
exchange  lessened,  and  in  terms  of  domestic  money  (compensated 
dollars)  he  would  receive  less  than  he  got  before.  All  commodities 
of  export  would  fall  in  price  at  once,  or  fail  to  rise,  to  the  extent  of  the 
seigniorage.  The  exporters  would  be  as  hotly  indignant  with  the 
plan  as  if  an  excise  tax  had  been  imposed  on  their  commodities  without 
any  possibility  of  their  raising  the  price  of  their  products.  Consider 
for  a  moment  what  would  be  the  state  of  mind  in  our  cotton-export- 
ing South.  Is  it  to  be  supposed  that  any  set  of  legislators  could  resist 
the  political  pressure  from  the  various  exporting  sections,  and  carry 
out  the  scheme  unflinchingly?  Can  we  imagine  a  Congressman 
telling  his  constituents  that  they  need  only  wait  a  while,  until  all 
money  incomes  and  all  prices  had  adjusted  themselves  to  the  new 
conditions  ?  that  then  nobody  would  be  worse  off  or  better  off  than 
before  ?    To  ask  this  sort  of  question  is  to  answer  it. 

in 

In  view  of  all  these  complications,  uncertainties,  and  pohtical 
and  sectional  obstacles,  the  question  presents  itself  whether  the 
emergency  is  so  serious,  the  evil  so  great,  the  gain  to  be  secured  so 
unmistakable,  that  it  is  worth  while  to  press  so  far-reaching  a  change. 

Professor  Fisher  has  predicted  that  prices  will  rise  further.  He 
is  disposed  to  believe  that  there  will  be  not  only  a  rise,  but  that  there 
will  be  a  considerable  rise.  I  hesitate  very  greatly  to  enter  the  domain 
of  prediction.  I  am  inclined  to  beheve  that  the  rise  in  prices  will 
not  cease  for  the  next  decade;  but  whether  it  will  be  considerable  or 
moderate  or  negligible  in  extent,  I  should  not  venture  to  say.  Pre- 
dictions concerning  the  output  from  the  mines  are  to  be  taken  with 
the  greatest  caution.  We  all  recall  the  predictions  which  Suess  made 
in  1892.'  The  distinguished  geologist  believed  that  the  prospects 
of  an  increased  production  of  gold  were  of  the  slightest,  and  that  the 
world  must  fall  back  on  the  use  of  both  metals.  How  different  the 
course  of  events  has  been  from  that  which  he  predicted!  There  are 
those  who  believe  that  the  output  of  gold,  so  far  from  continuing  to 
increase,  has  reached,  or  is  approaching,  its  maximum.*  For  myself, 
I  should  not  be  surprised  if  there  were  a  cessation  in  growth,  and 

•  E.  Suess,  Die  Zukunft  des  Silbers  (1892). 

'  See,  for  example,  R.  A.  Lehfeldt,  in  the  Economic  Journal,  XXII,  487  (Sep- 
tember, 19 1 2), 


482  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

should  certainly  be  surprised  if  there  were  not  a  relaxation  in  the 
rate  of  growth. 

Further:  it  deserves  to  be  borne  in  mind  that  the  total  supply 
of  the  precious  metals  is  now  so  much  greater  than  it  was  twenty 
years  ago  that  the  same  annual  increment  will  have  much  less  eflect 
on  prices.  This  is  the  familiar  consequence  of  the  durability  of  the 
precious  metals. 

Finally,  a  circumstance  should  be  borne  in  mind  which  bears  not 
only  upon  the  intrinsic  desirability  of  a  regulative  plan,  but  also  upon 
the  attitude  of  the  general  public  and  the  consequent  political  and 
industrial  possibilities.  The  economist  is  thinking  and  reasoning 
about  the  change  which  has  been  of  special  interest  for  him — the 
general  rise  in  prices.  The  man  on  the  street  is  thinking  about  the 
exceptional  rise  in  the  prices  of  one  important  set  of  commodities. 
Anyone  who  will  examine  with  care  the  index  numbers  of  our  Bureau 
of  Labor  will  see  what  a  marked  rise,  much  beyond  that  of  the  general 
index  number,  has  appeared  in  the  prices  of  farm  products,  and 
especially  in  the  prices  of  meat.  That  special  advance  has  taken 
place  within  the  last  three  or  four  years.  It  is  precisely  within  this 
period  that  general  attention  has  been  turned  to  rising  prices.  What 
the  public  has  had  chiefly  in  mind  has  been  not  the  general  change, 
but  the  particular  change  in  the  commodities  of  wide  consumption. 
This,  I  believe,  is  the  main  cause  of  labor  unrest. 

Whatever  be  the  particular  causes  that  have  led  to  the  high 
prices  of  food,  economists  agree  that  these  causes  will  operate  irre- 
spective of  any  compensated  dollar  plan.  This  would  simply  serve, 
at  its  best,  to  keep  general  prices  where  they  are,  leaving  each  particu- 
lar group  of  commodities  subject  to  its  own  particular  set  of  causes. 
If  the  compensated  dollar  plan  were  to  be  adopted,  and  if  the  prices 
of  food  should  continue  to  mount,  there  would  be  disappointment 
for  the  general  public,  but  nothing  to  surprise  the  economist.  And 
conversely,  it  is  entirely  possible  that  the  rise  in  the  cost  of  living, 
that  is,  the  special  rise  in  the  prices  of  food-stuflfs,  will  reach  its  end 
irrespective  of  any  monetary  change  whatever.  The  general  rise  in 
prices  and  money  incomes,  to  repeat  what  has  already  been  said,  is 
not  unwelcome  to  the  great  majority  of  people.  Its  incidental  con- 
sequences are  perceived  and  debated  chiefly  by  the  economists; 
such  as  the  effects  on  the  creditor  class  and  the  slowness  of  so-called 
fixed  incomes  to  rise  correspondingly.  The  general  public  is  con- 
cerned chiefly  with  the  conspicuous  rise  in  the  prices  of  food-stuffs, 


MONEY  AND  PRICES  483 

which  is  ascribable  to  causes  very  different  from  those  that  bring  the 
general  rise,  and  can  be  reached  only  by  remedies  very  different. 

In  sum,  I  am  not  convinced  that  the  evils  of  the  present  system 
are  so  great  as  to  call  for  the  extraordinary  remedy  proposed.  If, 
indeed,  consequences  of  the  most  serious  sort  were  imminent  from  an 
overwhelming  increase  in  the  gold  supply,  we  might  feel  disposed  to 
move  heaven  and  earth  to  prevent  them.  Obstacles  from  inter- 
national jealousy,  or  from  wide-spread  misconceptions  and  fallacies, 
could  then  only  spur  us  to  greater  exertions.  But  if  the  evils  are  as 
yet  not  unbearable;  if  those  against  which  the  public  most  rebels 
are  due  chiefly  to  other  causes  than  the  mere  increase  in  gold  supply; 
if  the  remedy  proposed  is  one  whose  operation  is  far  from  certain, 
likely  to  lead  to  complications  of  its  own,  and  in  danger  of  being 
discarded  on  its  first  failure  to  work  a  cure — let  us  bear  the  ills  we  have. 

141.  METHODS  OF  REGULATING  A  PAPER  CURRENCY' 

The  state  may  either  take  the  issue  of  representative  money  into 
its  own  hands,  as  it  takes  the  coining  of  money,  or  it  may  allow 
private  individuals,  or  semi-public  companies  and  corporations,  to 
undertake  the  work  under  more  or  less  strict  legislative  control.  In 
either  case  we  may  lay  down  the  following  series  of  methods  according 
to  which  the  amount  of  issue  may  be  regulated,  and  the  performance 
of  the  promises  guaranteed. 

1.  The  simple  deposit  method. — ^The  issuer  of  promissory  notes 
may  be  obliged  to  keep  a  stock  of  coin  and  bullion  constantly  on  hand, 
equal  in  amount  to  the  aggregate  of  the  uncanceled  notes,  each  of 
which,  being  instantly  paid  on  presentation,  will  produce  a  corre- 
sponding decrease  of  the  reserve. 

2.  The  partial  deposit  method. — Instead  of  being  obliged  to  keep 
the  whole  of  the  precious  metals  deposited  in  his  vaults,  the  issuer 
may  be  allowed  to  invest  a  fixed  amount  in  government  funds,  or 
other  safe  profitable  securities. 

3.  The  minimum  reserve  method. — The  issuer  may  be  bound  to  have 
on  hand  under  all  circumstances  a  fixed  minimum  amount  of  coin  and 
bullion. 

4.  The  proportional  reserve  method. — The  reserve  may  be  made  to 
vary  with  the  amount  of  outstanding  notes,  being,  say,  at  least  one- 
third  or  one-fourth  of  the  total. 

'  From  W.  S.  Jevons,  Money  and  the  Mechanism  of  Exchange,  chap,  xviii. 


484  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

5.  The  maximum  issue  method. — Permission  may  be  given  to  issue 
notes  not  exceeding  in  the  aggregate  a  fixed  amount,  prohibitory 
penalties  being  imposed  upon  any  breach  of  this  restriction. 

6.  The  elastic  limit  method. — A  limit  may  be  assigned  to  the 
aggregate  amount  of  notes,  as  in  the  last  method,  but  the  penalties  on 
the  excessive  issue  may  be  intentionally  made  so  light,  that  the  issuer 
will  under  some  circumstances  prefer  to  pay  the  penalty  rather  than 
restrict  his  issues. 

7.  The  documentary  reserve  method. — The  reserve  of  property  which 
the  issuer  is  required  to  keep  may  consist  not  of  gold  or  silver  coin  or 
bullion,  but  of  government  funds,  bonds,  shares,  or  other  documentary 
securities. 

8.  The  real  property  reserve  method. — Instead  of  merely  documen- 
tary property,  the  issuer  may  be  allowed  to  treat  various  property, 
such  as  land,  houses,  ships,  railway  shares,  etc.,  as  his  reserve  of  wealth 
to  meet  engagements. 

9.  The  foreign  exchanges  method. — Some  important  bank  may  be 
allowed  to  isgue  convertible  notes  on  the  understanding  that  it  will 
not  increase  the  amount  in  circulation  so  long  as  the  foreign  exchanges 
are  against  the  country,  and  render  the  export  of  specie  profitable. 

10.  The  free  issue  method. — The  business  of  issuing  promissory 
notes  may  be  left  open  to  the  free  competition  of  all  individuals,  free 
from  any  restrictions  or  conditions,  except  such  laws  as  apply  to  all 
commercial  contracts  and  promises. 

11.  The  gold  par  method. — Paper  money  may  be  issued,  bearing 
the  appearance  of  promissory  notes,  but  inconvertible  into  coin.  The 
issue  being  restricted  as  long  as  any  premium  on  gold  is  apparent,  the 
paper  money  may  be  thus  maintained  equal  in  value  to  the  coin 
which  it  nominally  represents. 

12.  The  revenue  payments  method. — Inconvertible  paper  money 
may  be  freely  issued,  but  an  attempt  may  be  made  to  keep  up  its 
value  by  receiving  it  in  place  of  coin  in  the  payment  of  taxes. 

13.  The  deferred  convertibility  method. — Notes  may  be  issued 
promising  to  pay  metallic  money  at  some  future  day,  either  definitely 
fixed  or  dependent  upon  political  or  other  contingent  events. 

14.  The  paper  money  method. — Lastly,  those  who  coin  apparent 
promissory  notes  may  be  entirely  absolved  from  the  performance  of 
their  promises,  so  that  the  notes  circulate  by  force  of  habit,  by  the 
command  of  the  sovereign,  or  in  consequence  of  the  absence  of  any 
other  medium  of  exchange. 


MONEY  AND  PRICES  485 

Although  I  have,  in  the  above  statement,  enumerated  no  less  than 
fourteen  distinct  methods  of  managing  the  issue  of  paper  currency, 
it  is  by  no  means  certain  that  other  methods  have  not  been  employed 
from  time  to  time.  There  may  be,  in  fact,  an  almost  unlimited 
number  of  devices  for  securing  the  performance  of  promises,  or  for 
rendering  the  performance  unnecessary.  Moreover,  these  methods 
may  be  combined  together  in  almost  unlimited  variety.  The  reserve 
may  be  required  to  be  partially  in  the  form  of  specie,  and  partially  in 
documentary  securities,  or  real  property.  A  banker  may  be  allowed 
to  issue  a  certain  fixed  amount  of  notes  without  any  condition  as  to 
reserves,  and  to  issue  further  notes  on  the  deposit  method. 

142.    PAPER  MONEY:  THE  CONTINENTAL  CURRENCY' 

The  depreciation  began  at  different  periods  in  different  states; 
but  in  general  about  the  middle  of  the  year  1777,  and  progressively 
increased  for  three  or  four  years.  Toward  the  last  of  1777,  the 
depreciation  was  about  two  or  three  for  one;  in  1778  it  advanced 
from  two  or  three  for  one  to  five  or  six  for  one;  in  1779,  from  five 
or  six  for  one  to  27  or  28  for  one;  in  1780  from  27  or  28  for  one  to  50 
or  60  for  one,  in  the  first  four  or  five  months.  Its  circulation  was  after- 
ward partial,  but  where  it  passed  it  soon  depreciated  to  150  for  one. 
In  some  few  parts  it  continued  in  circulation  for  the  first  four  or  five 
months  of  1781,  but  in  this  latter  period  many  would  not  take  it  at 
any  rate,  and  they  who  did,  received  it  at  a  depreciation  of  several 
hundreds  for  one. 

As  there  was  a  general  clamor  on  account  of  the  floods  of  money, 
which  at  successive  periods  had  deluged  the  states,  it  was  resolved 
in  October,  1779,  that  no  further  sum  should  be  issued  on  any  account 
whatever  than  what,  when  added  to  the  present  sum  in  circulation, 
would  in  the  whole  be  equal  to  200  millions  of  dollars.  It  was  at 
the  same  time  resolved,  that  Congress  should  emit  only  such  a  part 
of  the  sum  wanting  to  make  up  200  millions,  as  should  be  absolutely 
necessary  for  the  public  exigencies,  before  adequate  supplies  could 
be  otherwise  obtained,  relying  for  such  supplies  on  the  exertions  of 
the  several  states.  This  was  forcibly  represented  in  a  circular  letter 
from  Congress  to  their  constituents,  and  the  states  were  earnestly 
intreated  to  prevent  that  deluge  of  evils  which  would  flow  from 
their  neglecting  to  furnish  adequate  supplies  for  the  wants  of  the  con- 

'  From  David  Ramsay,  History  of  the  American  Revolution  (1789),  II,  128-36 


486  MATERL\LS  FOR  ELEMENTARY  ECONOMICS 

federacy.  The  same  circular  letter  stated  the  practicability  of  redeem- 
ing all  the  bills  of  Congress  at  par  with  gold  and  silver,  and  rejected 
with  indignation  the  supposition  that  the  states  would  ever  tarnish 
their  credit  by  violating  public  faith.  These  strong  declarations  in 
favor  of  the  paper  currency  deceived  many  to  repose  confidence  in  it 
to  their  ruin.  Subsequent  events  compelled  Congress  to  adopt  the 
very  measure  in  1780,  which  in  the  preceding  year  they  had  sincerely 
reprobated. 

From  the  non-compliance  of  the  states,  Congress  was  obliged  in  a 
short  -time  after  the  date  of  their  circular  letter  to  issue  such  a  further 
quantity  as  when  added  to  previous  emissions  made  the  sum  of  200 
millions  of  dollars.  Besides  this  immense  sum,  the  paper  emissions  of 
the  different  states  amounted  to  many  millions;  which  mixed  with 
the  continental  money,  and  added  to  its  depreciation.  What  was 
of  little  value  before  now  became  of  less.  The  whole  was  soon 
expended,  and  yet  from  its  increased  depreciation  the  immediate 
wants  of  the  army  were  not  supplied.  The  source  which  for  five 
years  had  enabled  Congress  to  keep  an  army  in  the  field  being 
exhausted.  General  Washington  was  reduced  for  some  time  to  the 
alternative  of  disbanding  his  troops,  or  of  supplying  them  by  a  mili- 
tary force.  He  preferred  the  latter,  and  the  inhabitants  of  New 
York  and  New  Jersey,  though  they  felt  the  injury,  saw  the  necessity, 
and  patiently  submitted. 

The  states  were  next  called  upon  to  furnish  in  lieu  of  money 
determinate  quantities  of  beef,  pork,  flour,  and  other  articles,  for  the 
use  of  the  army.  This  was  called  a  requisition  for  specific  supplies 
or  a  tax  in  kind,  and  was  found  on  experiment  to  be  so  diflScult  of 
execution,  so  inconvenient,  partial,  and  expensive,  that  it  was  speedily 
abandoned.  About  this  time.  Congress  resolved  upon  another 
expedient.  This  was  to  issue  a  new  species  of  paper  money,  under 
the  guaranty  of  the  several  states.  The  old  money  was  to  be  called 
in  by  taxes,  and  as  soon  as  brought  in  to  be  burnt,  and  in  lieu  thereof, 
one  dollar  of  the  new  was  to  be  emitted  for  every  twenty  of  the  old, 
so  that  when  the  whole  200  millions  were  drawn  in  and  canceled,  only 
ten  millions  of  the  new  should  be  issued  in  their  place,  four-tenths  of 
which  were  to  be  subject  to  the  order  of  Congress,  and  the  remaining 
six-tenths  to  the  order  of  the  several  states.  These  new  bills  were  to 
be  redeemable  in  specie  within  six  years,  and  to  bear  an  interest  at 
the  rate  of  five  per  cent  to  be  paid  also  in  specie,  at  the  redemption  of 
the  bills,  or  at  the  election  of  the  owner  annually  in  bills  of  exchange 


MONEY  AND  PRICES  487 

on  the  American  commissioners  in  Europe,  at  four  shillings  and  six 
pence  for  each  dollar. 

From  the  execution  of  these  resolutions  it  was  expected,  that  the 
old  money  would  be  canceled,  that  the  currency  would  be  reduced 
to  a  fixed  standard,  that  the  states  would  be  supplied  with  the  means 
of  purchasing  the  specific  supplies  required  of  them,  and  that  Congress 
would  be  furnished  with  efficient  money,  to  provide  for  the  exigencies 
of  the  war.  That  these  good  effects  would  have  followed,  even  though 
the  resolutions  of  Congress  had  been  carried  into  execution,  is  very 
questionable,  but  from  the  partial  compliances  of  the  states  the 
experiment  was  never  fairly  made,  and  the  new  paper  answered  very 
little  purpose.  It  was  hoped  by  varying  the  ground  of  credit,  that 
Congress  would  gain  a  repetition  of  the  advantages  which  resulted 
from  their  first  paper  expedient,  but  these  hopes  were  of  short  duration. 
By  this  time  much  of  the  popular  enthusiasm  had  spent  itself,  and 
confidence  in  public  engagements  was  nearly  expired.  The  event 
proved  that  credit  is  of  too  delicate  a  nature  to  be  sported  with,  and 
can  only  be  maintained  by  honesty  and  punctuality.  The  several 
expedients  proposed  by  Congress  for  raising  supplies  having  failed,  a 
crisis  followed  very  interesting  to  the  success  of  the  revolution.  The 
particulars  of  this  shall  be  related  among  the  public  events  of  the  year 
1 781,  in  which  it  took  place.  Some  observations  on  that  primary 
instrument  of  American  Independence,  the  old  continental  bills  of 
credit,  shall  for  the  present  close  this  subject. 

Paper  of  no  intrinsic  value  was  made  to  answer  all  the  purposes 
of  gold  and  silver,  and  to  support  the  expenses  of  five  campaigns. 
This  was  in  some  degree  owing  to  a  previous  confidence,  which  had 
been  begotten  by  honesty  and  fidelity,  in  discharging  the  engage- 
ments of  government.  From  New  York  to  Georgia  there  never  had 
been,  in  matters  relating  to  money,  an  instance  of  a  breach  of  pubHc 
faith.  In  the  scarcity  of  gold  and  silver,  many  emergencies  had 
imposed  a  necessity  of  emitting  bills  of  credit.  These  had  been  uni- 
formly and  honestly  redeemed.  The  bills  of  Congress  being  thrown 
into  circulation,  on  this  favorable  foundation  of  public  confidence, 
were  readily  received.  The  enthusiasm  of  the  people  contributed  to 
the  same  effect.  That  the  endangered  liberties  of  America  ought  to  be 
defended,  and  that  the  credit  of  their  paper  was  essentially  necessary 
to  a  proper  defense,  were  opinions  engraven  on  the  hearts  of  a  great 
majority  of  the  citizens.  It  was  therefore  a  point  of  honor,  and  con- 
sidered as  a  part  of  duty,  to  take  the  bills  freely  at  their  full  value. 


488  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Private  gain  was  then  so  little  regarded,  that  the  Whig  citizens  were 
willing  to  run  all  the  hazards  incidental  to  bills  of  credit,  rather  than 
injure  the  cause  of  their  country  by  undervaluing  its  money.     Every- 
thing human  has  its  limits.     Wliile  the  credit  of  the  money  was 
well  supported  by  public  confidence  and  patriotism,  its  value  dimin- 
ished, from  the  increase  of  its  quantity.     Repeated  emissions  begat 
that  natural  depreciation,  which  results  from  an  excess  of  quantity. 
This  was  helped  on  by  various  causes,  which  affected  the  credit  of 
the  money.     The  enemy  very  ingeniously  counterfeited  their  bills 
and   industriously    circulated    their    forgeries   through    the    United 
States.     Congress  allowed  to  their  public  agents  a  commission  on  the 
amount  of  their  purchases.     Instead  of  exerting  themselves  to  pur- 
chase at  a  low  price,  they  had  therefore  an  interest  in  giving  a  high 
price  for  every  thing.     So  strong  was  the  force  of  prejudice,  that  the 
British  mode  of  supplying  armies  by  contract,  could  not  for  a  long 
time   obtain    the    approbation    of   Congress.      While    these    causes 
operated  confidence  in  the  public  was  abating,  and  at  the  same  time, 
that  fervor  of  patriotism  which  disregarded  interest  was  daily  declin- 
''ing.     To  prevent  or  retard  the  depreciation  of  their  paper  money, . 
Congress  attempted  to  prop  its  credit  by  means  which  ^vrecked  private 
property,  and  injured  the  morals  of  the  people  without  answering  the 
end  proposed.     They  recommended  to  the  states  to  pass  laws  for 
regulating  the  prices  of  labor,  manufacture,  and  all  sorts  of  com- 
modities, and  for  confiscating  and  selling  the  estates  of  Tories,  and 
for  investing  the  money  arising  from  the  sales  thereof  in  loan-oflTice 
certificates.    As  many  of  those  who  were  disaffected  to  the  revolution 
absolutely  refused  to  take  the  bills  of  Congress  even  in  the  first  stage 
of  the  war,  when  the  real  and  nominal  value  was  the  same,  with  the 
view  of  counteracting  their  machinations,   Congress  early  recom- 
mended to  the  states  to  pass  laws  for  making  the  paper  money  a  legal 
tender,  at  their  nominal  value  in  the  discharge  of  bona  fide  debts, 
though  contracted  to  be  paid  in  gold  and  silver.     With  the  same  views, 
they  further  recommended  that  laws  should  be  passed  by  each  of  the 
states,  ordaining  that  "whosoever  should  ask  or  receive  more,  in  their 
bills  of  credit  for  gold  or  silver  or  any  species  of  money  whatsoever, 
than  the  nominal  sum  thereof  in  Spanish  dollars,  or  more  in  the  said 
bills  for  any  commodities  whatsoever,  than  the  same  could  be  pur- 
chased from  the  same  person  in  gold  and  silver,  or  offer  to  sell  any 
commodities  for  gold  and  silver,  and  refuse  to  sell  the  same  for  the  said 
bills,  shall  be  deemed  an  enemy  to  the  liberties  of  the  United  States, 


MONEY  AND  PRICES  489 

and  forfeit  the  property  so  sold  or  offered  for  sale."  The  laws  which 
were  passed  by  the  states,  for  regulating  the  prices  of  labor  and  com- 
modities, were  found  on  experiment  to  be  visionary  and  impracticable. 
They  only  operated  on  the  patriotic  few,  who  were  disposed  to  sacrifice 
every  thing  in  the  cause  of  their  country,  and  who  implicitly  obeyed 
every  mandate  of  their  rulers.  Others  disregarded  them,  and  either 
refused  to  part  with  their  commodities,  or  demanded  and  obtained 
their  own  prices. 

These  laws  in  the  first  instance  made  an  artificial  scarcity,*  and 
had  they  not  been  repealed  would  soon  have  made  a  real  one,  for  men 
never  exert  themselves  unless  they  have  the  fruit  of  their  exertions 
secured  to  them,  and  at  their  own  disposal. 

The  confiscation  and  sale  of  the  property  of  Tories,  for  the  most 
part  brought  very  little  into  the  public  treasury.  The  sales  were 
generally  made  for  credit  and  by  the  progressive  depreciation,  what 
was  dear  at  the  time  of  the  purchase,  was  very  cheap  at  the  time  of 
payment.  The  most  extensive  mischief  resulted,  in  the  progress  and 
toward  the  close  of  the  war,  from  the  operation  of  the  laws  which 
made  the  paper  bills  a  tender  in  the  discharge  of  debts  contracted 
payable  in  gold  or  silver.  When  this  measure  was  first  adopted 
little  or  no  injustice  resulted  from  it,  for  at  that  time  the  paper  bills 
were  equal,  or  nearly  equal  to  gold  or  silver,  of  the  same  nominal  sum. 
In  the  progress  of  the  war,  when  depreciation  took  place,  the  case  was 
materially  altered.  Laws  which  were  originally  innocent  became 
eventually  the  occasion  of  much  injustice. 

The  aged  who  had  retired  from  the  scenes  of  active  business,  to 
enjoy  the  fruits  of  their  industry,  found  their  substance  melting  away 
to  a  mere  pittance,  insufficient  for  their  support.  The  widow  who 
lived  comfortably  on  the  bequests  of  a  deceased  husband  experienced  a 
frustration  of  all  his  well-meant  tenderness.  The  laws  of  the  country 
interposed,  and  compelled  her  to  receive  a  shilling,  where  a  pound 
was  her  due.  The  blooming  virgin  who  had  grown  up  with  an 
unquestionable  title  to  a  liberal  patrimony  was  legally  stripped  of 
everything  but  her  personal  charms  and  virtues.  The  hapless  orphan, 
instead  of  receiving  from  the  hands  of  an  executor  a  competency  to  set 
out  in  business,  was  obliged  to  give  a  final  discharge  on  the  payment 
of  td.  in  the  pound.  In  many  instances,  the  earnings  of  a  long  life 
of  care  and  diligence  were,  in  the  space  of  a  few  years,  reduced  to  a 
trifling  sum.  A  few  persons  escaped  these  affecting  calamities  by 
secretly  transferring  their  bonds,  or  by  flying  from  the  presence  or 


490  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

neighborhood  of  their  debtors.  The  evils  which  resulted  from  the 
legal  tender  of  these  paper  bills  were  foreign  from  the  intentions  of 
Congress,  and  of  the  state  legislatures.  It  is  but  justice  to  add 
further  that  a  great  proportion  of  them  flowed  from  ignorance. 
Till  the  year  1780,  when  the  bills  fell  to  forty  for  one,  it  was  designed 
by  most  of  the  rulers  of  America,  and  believed  by  a  great  majority 
of  the  people,  that  the  whole  sum  in  circulation  would  be  appreciated 
by  a  reduction  of  its  quantity,  so  as  finally  to  be  equal  to  gold  or  silver. 
In  every  department  of  government  the  Americans  erred  from  ignor- 
ance, but  in  none  so  much  as  in  that  which  related  to  money. 

Such  were  the  evils  which  resulted  from  paper  money.  On  the 
other  hand,  it  was  the  occasion  of  good  to  many.  It  was  at  all  times 
the  poor  man's  friend.  While  it  was  current,  all  kinds  of  labor  very 
readily  found  their  reward.  In  the  first  years  of  the  war,  none  were 
idle  from  want  of  employment,  and  none  were  employed,  without 
having  it  in  their  power  to  obtain  ready  payment  for  their  services. 
To  that  class  of  people,  whose  daily  labor  was  their  support,  the 
depreciation  was  no  disadvantage.  E.xpending  their  money  as  fast 
as  they  received  it,  they  always  got  its  full  value.  The  reverse  was 
the  case  with  the  rich,  or  those  who  were  disposed  to  hoarding.  No 
agrarian  law  ever  had  a  more  extensive  operation  than  Continental 
money.  That  for  which  the  Gracchi  lost  their  lives  in  Rome,  was 
peaceably  effected  in  the  United  States  by  the  legal  tender  of  these 
depreciating  bills.  The  poor  became  rich,  and  the  rich  became  poor. 
Money-lenders,  and  they  whose  circumstances  enabled  them  to 
give  credit,  were  essentially  injured.  All  that  the  money  lost  in  its 
value  was  so  much  taken  from  their  capital,  but  the  active  and 
industrious  indemnified  themselves,  by  conforming  the  price  of  their 
services  to  the  present  state  of  the  depreciation.  The  experience  of 
this  time  inculcated  on  youth  two  salutary  lessons,  the  impolicy  of 
depending  on  paternal  acquisitions,  and  the  necessity  of  their  own 
exertions.  They  who  were  in  debt,  and  possessed  property  of  any 
kind,  could  easily  make  the  latter  extinguish  the  former.  Every- 
thing that  was  useful  when  brought  to  market  readily  found  a  pur- 
chaser. A  hog  or  two  would  pay  for  a  slave;  a  few  cattle  for  a  com- 
fortable house ;  and  a  good  horse  for  an  improved  plantation.  A  small 
part  of  the  productions  of  a  farm  would  discharge  the  long-outstand- 
ing accounts  due  from  its  owner.  The  dreams  of  the  golden  age 
were  realized  to  the  poor  man  and  the  debtor,  but  unfortunately  what 
these  gained  was  just  so  much  taken  from  others. 


MONEY  AND  PRICES  491 

The  evils  of  depreciation  did  not  terminate  with  the  war.  They 
extend  to  the  present  hour.  That  the  helpless  part  of  the  community 
were  legislatively  deprived  of  their  property  was  among  the  lesser 
evils  which  resulted  from  the  legal  tender  of  the  depreciated  bills  of 
credit.  The  iniquity  of  the  laws  estranged  the  minds  of  many  of 
the  citizens  from  the  habits  and  love  of  justice. 

The  nature  of  obhgations  was  so  far  changed  that  he  was  reckoned 
the  honest  man  who  from  principle  delayed  to  pay  his  debts.  The 
mounds  which  government  had  erected,  to  secure  the  observance  of 
honesty  in  the  commercial  intercourse  of  man  with  man,  were  broken 
down.  Truth,  honor,  and  justice  were  swept  away  by  the  overflowing 
deluge  of  legal  iniquity,  nor  have  they  yet  assumed  their  ancient 
and  accustomed  seats.  Time  and  industry  have  already,  in  a  great 
degree,  repaired  the  losses  of  property,  which  the  citizens  sustained 
during  the  war,  but  both  have  hitherto  failed  in  effacing  the  taint 
which  was  then  communicated  to  their  principles,  nor  can  its  total 
ablution  be  expected  till  a  new  generation  arises,  unpracticed  in  the 
iniquities  of  their  fathers. 


492 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


143.    DEPRECIATION  OF  THE  CONTINENTAL  CURRENCY- 
Jefferson's  Table  of  Emissions 


Emissions 


1775,  June  23 
Nov.  29 

1776,  Feb.  17 
Aug.  13 

1777,  May  20 
Aug.  IS 
Nov.  7 
Dec.    3 

1778,  Jan.  8 
Jan.  22 
Feb.  16 
Mar.  5 
April  4 
April  II 
April  18 
May  22 
June  20 
July  30 
Sept.  s 
Sept.  26 
Nov.  4 
Dec.  14 

1779,  Jan.  14 
Feb.  3 
Feb.  12 
April  2 
May  5 
June  4 
June  17 
Sept.  17 
Oct.  14 
Nov.  17 
Nov.  29 


Sum  Emitted 


$2,000,000 

3,000,000 

4,000,000 

5,000,000 

5,000,000 

1,000,000 

1,000,000 

1,000,000 

1,000,000 

2,000,000 

2,000,000 

2,000,000 

1,000,000 

5,000,000 

500,000 

5,000,000 

5,000,000 

5,000,000 

5,000,000 

10,000,100 

10,000,100 

10,000,100 

24,447,620* 

5,000,160 

5,000,160 

5,000,160 

10,000,100 

10,000,100 

15,000,280 

15,000,260 

5,000,180 

10,050,540 

10,000,140 


$200,000,000 


Depreciation 


2, 

3 

4 

4 

4 

4 

S 

5 

6 

6 

6 

5 

4 

4^ 

5 

5 

6 

6 

8 
10 
10 

17 

24 

20 

20 

24 

30 

38^ 

385 


2,3 


Worth  of  the  Sum 

Emitted  in  Silver 

Dollars 


$2,000,000 
3,000,000 
4,000,000 
5,000,000 
1,877,273 

333,333i 

250,000 

250,000 

250,000 

500,000 

400,000 

400,000 

i66,666| 

833,3333 

88,333* 
1,000,000 
1,250,000 
I, III, III 
1,000,000 
2,000,020 
1,666,683* 
1,666,683* 

3,055,954 
500,016 
500,016 
294,127 
4i6,67a| 
500,005 

750,014 

625,010! 

166,672! 

261,053 

259,743 


$36,367,719! 


♦  The  sum  actually  voted  was  $50,000,400,  but  part  of  it  was  for  exchange  of  old  bills,  without 
saying  how  much.  It  is  presumed  that  these  exchanges  absorbed  $25,552,780,  because  $24,447,620 
with  all  the  other  emissions  preceding  September  2,  1779,  will  amount  to  $159,948,880,  the  sum  which 
Congress  declared  to  be  then  in  circulation. 

'  From  Henry  Phillips,  Historical  Sketches  of  American  Paper  Currency,  Second 
Series  (1866),  p.  199. 


MONEY  AND  PRICES  493 

144.     GREENBACK  PRICES  DURING  THE  CIVIL  WAR» 


I860 


1861 


1862 


1863 


1864 


1865 


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Relative  Prices  at  Wholesale  and  the  Value  of  Gold  Coin  in 

currenxy,  1860-65 

145.    DEPRECIATED   PAPER  MONEY  IN  THE  CONFEDERACY* 

The  financial  system  adopted  by  the  Confederate  government 
was  singularly  simple  and  free  from  technicalities.  It  consisted 
chiefly  in  the  issue  of  treasury  notes  enough  to  meet  all  the  expenses 
of  the  government,  and  in  the  present  advanced  state  of  the  art  of 
printing  there  was  but  one  difficulty  incident  to  this  process;  namely, 
the  impossibility  of  having  the  notes  signed  in  the  Treasury  Depart- 

»From  W.  C.  Mitchell,  A  History  of  the  Greenbacks,  p.  277.  University  of 
Chicago  Press,  1903. 

'  Adapted  from  G.  C.  Eggleston,  A  Rebel's  Recolleclioiis,  pp.  78-93-  Hurd  & 
Houghton,  1875. 


494  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

ment,  as  fast  as  they  were  needed.  There  happened,  however,  to 
be  several  thousand  young  ladies  in  Richmond  willing  to  accept  light 
and  remunerative  employment  at  their  homes,  and  as  it  was  really  a 
matter  of  small  moment  whose  name  the  notes  bore,  they  were  given 
out  in  sheets  to  these  young  ladies,  who  signed  and  returned  them  for  a 
consideration.  I  shall  not  undertake  to  guess  how  many  Confederate 
treasury  notes  were  issued.  Indeed,  I  am  credibly  informed  by  a 
gentleman  who  was  high  in  oflSce  in  the  Treasury  Department,  that 
even  the  secretary  himself  did  not  certainly  know.  The  acts  of  Con- 
gress authorizing  issues  of  currency  were  the  hastily  formulated 
thought  of  a  not  very  wise  body  of  men,  and  my  informant  tells  me 
that  they  were  frequently  susceptible  of  widely  different  construction 
by  different  oflScials.  However  that  may  be,  it  was  clearly  out  of 
the  power  of  the  government  ever  to  redeem  the  notes,  and  whatever 
may  have  been  the  state  of  affairs  within  the  treasury,  nobody  outside 
its  precincts  ever  cared  to  muddle  his  head  in  an  attempt  to  get  at 
exact  figures. 

We  knew  only  that  money  was  astonishingly  abundant.  Provi- 
sions fell  short  sometimes,  and  the  supply  of  clothing  was  not  always 
as  large  as  we  should  have  liked,  but  nobody  found  it  difficult  to  get 
money  enough.     It  was  to  be  had  almost  for  the  asking. 

Money  was  so  easily  got,  and  its  value  was  so  utterly  uncertain, 
that  we  were  never  able  to  determine  what  was  a  fair  price  for  any- 
thing. We  fell  into  the  habit  of  paying  whatever  was  ^.sked,  knowing 
that  tomorrow  we  should  have  to  pay  more.  Speculation  became 
the  easiest  and  surest  thing  imaginable.  The  speculator  saw  no 
risks  of  loss.  Every  article  of  merchandise  rose  in  value  every  day, 
and  to  buy  anything  this  week  and  sell  it  next  was  to  make  an  enor- 
mous profit  quite  as  a  matter  of  course. 

Naturally  enough,  speculation  soon  fell  into  very  bad  repute,  and 
the  epithet  "speculator"  came  to  be  considered  the  most  opprobrious 
in  the  whole  vocabulary  of  invective.  The  feeling  was  universal 
that  the  speculators  were  fattening  upon  the  necessities  of  the  country 
and  the  sufferings  of  the  people.  Nearly  all  mercantile  business 
was  regarded  at  least  with  suspicion,  and  much  of  it  fell  into  the  hands 
of  people  with  no  reputations  to  lose,  a  fact  which  certainly  did  not 
tend  to  relieve  the  community  in  the  matter  of  high  prices. 

The  prices  which  obtained  were  almost  fabulous,  and  singularly 
enough  there  seemed  to  be  no  sort  of  ratio  existing  between  the  values 
of  different  articles.    I  bought  coffee  at  forty  dollars  and  tea  at 


MONEY  AND  PRICES  495 

thirty  dollars  a  pound  on  the  same  day.  My  dinner  at  a  hotel  cost 
me  twenty  dollars,  while  five  dollars  gained  me  a  seat  in  the  dress 
circle  of  the  theater.  I  paid  one  dollar  the  next  morning  for  a  copy 
of  the  Examiner,  but  I  might  have  got  the  Whig,  Dispatch,  Enquirer, 
or  Sentinel  for  half  that  sum.  For  some  wretched  tallow  candles  I 
paid  ten  dollars  a  pound.  The  utter  absence  of  proportion  between 
these  several  prices  is  apparent,  and  I  know  of  no  way  of  explaining 
it  except  upon  the  theory  that  the  unstable  character  of  the  money 
had  superinduced  a  reckless  disregard  of  all  value  on  the  part  of 
both  buyers  and  sellers.  A  facetious  friend  used  to  say  prices  were 
so  high  that  nobody  could  see  them,  and  that  they  "got  mixed  for 
want  of  supervision."  He  held,  however,  that  the  difference  be- 
tween the  old  and  the  new  order  of  things  was  a  trifling  one. 
"Before  the  war,"  he  said,  "I  went  to  market  with  the  money  in 
my  pocket,  and  brought  back  my  purchases  in  a  basket;  now  I  take 
the  money  in  the  basket,  and  bring  the  things  home  in  my  pocket." 

I  am  sometimes  asked  at  what  time  prices  attained  their  highest 
point  in  the  Confederacy,  and  I  find  that  memory  fails  to  answer  the 
question  satisfactorily.  They  were  about  as  high  as  they  could  be 
in  the  fall  of  1863,  and  I  should  be  disposed  to  fix  upon  that  as  the 
time  when  the  climax  was  reached,  but  for  my  consciousness  that  the 
law  of  constant  appreciation  was  a  fixed  one  throughout  the  war. 
The  financial  condition  got  steadily  worse  to  the  end.  I  believe  the 
highest  price,  relatively,  I  ever  saw  paid,  was  for  a  pair  of  boots.  A 
cavalry  officer,  entering  the  little  country  store,  found  there  one  pair 
of  boots  which  fitted  him.  He  inquired  the  price.  "Two  hundred 
dollars,"  said  the  merchant.  A  five  hundred  dollar  bill  was  offered, 
but  the  merchant,  having  no  smaller  bills,  could  not  change  it. 
"Never  mind,"  said  the  cavalier,  "I'll  take  the  boots  anyhow.  Keep 
the  change;  I  never  let  a  little  matter  of  three  hundred  dollars  stand 
in  the  way  of  a  trade." 

That  was  on  the  day  before  Lee's  surrender,  but  it  would  not  have 
been  an  impossible  occurrence  at  any  time  during  the  preceding 
year.  The  money  was  of  so  little  value  that  we  parted  with  it  gladly 
whenever  it  would  purchase  anything  at  all  desirable.  I  cheerfully 
paid  five  dollars  for  a  little  salt,  at  Petersburg,  in  August,  1864,  and 
being  thirsty  drank  my  last  two  dollars  in  a  half-pint  of  cider. 

The  government's  course  in  levying  a  tax  in  kind,  as  the  only 
possible  way  of  making  the  taxation  amount  to  anything,  led  speedily 
to  the  adoption  of  a  similar  plan,  as  far  as  possible,  by  the  people.    A 


496  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

physician  would  order  from  his  planter  friend  ten  or  twenty  visits* 
worth  of  corn,  and  the  transaction  was  a  perfectly  intelligible  one  to 
both.  The  visits  would  be  counted  at  ante-war  rates,  and  the  corn 
estimated  by  the  same  standard. 

146.    DEPRECIATED  MONEY  AND  WAGE-EARNERS:  THE 

STRIKE  AT  IQUIQUE' 

Iquique  is  a  port  of  Northern  Chile  on  the  Pacific  Ocean,  with  a 
population  of  about  40,000.  The  city  is  built  at  the  water's  edge  on 
a  low,  flat  area  directly  under  high,  yellow,  sand  bluffs.  Above  the 
bluffs  are  the  pampas,  which  stretch  back  in  arid  wastes  into  the 
interior.  On  these  elevated  plains  are  to  be  found  the  deposits  of 
minerals  and  nitrate  which  have  been  the  basis  of  the  Chilean  income 
since  the  recent  war  with  Peru.  The  nitrate  officinas  are  supplied 
with  laborers  mainly  drawn  from  among  the  natives,  or  so-called  rotos. 
These  men  have  many  good  qualities,  and  are  loyal  and  industrious 
when  well  treated;  but  the  exjjloitation  of  the  roto  by  the  employing 
class  is  unfortunately  not  rare.  In  many  instances  the  laborer  is  a 
peon,  practically  attached  to  the  soil;  because,  by  law,  he  cannot 
migrate  while  he  is  in  debt  to  his  employer  and  the  latter  is  easily 
able  to  make  the  condition  of  being  indebted  practically  permanent. 

The  facts  as  to  the  strike  at  Iquique  in  December,  1907,  were  care- 
fully concealed  from  the  outside  world  by  oflBcial  censorship;  but  its 
bloody  outcome  was  an  illustration,  which  should  not  go  unrecorded, 
of  the  influence  of  a  bad  monetary  system  upon  the  labor  question. 
In  Chile,  before  the  war  with  Peru  and  Bolivia  in  1879,  the  paper 
money  was  convertible  into  gold  at  48J.  per  peso.  Later,  the  paper 
fell  to  about  2,6(1.  In  recent  years,  it  went  to  iSd.,  largely  because  the 
government  confused  the  fiscal  with  the  monetary  functions  of  the 
treasury,  and  borrowed  under  the  form  of  large  issues  of  paper  money. 
About  1904,  the  country  was  caught  in  a  wild  whirl  of  speculation  and 
over-expansion,  which  came  to  an  end  with  the  frightful  earthquake  of 
1906,  especially  destructive  at  Valparaiso.  Then  the  paper  subse- 
quently fell  as  low  as  7 J.  or  8d.  The  proposals  of  redemption  force- 
fully urged  upon  Congress  by  President  Montt,  looking  to  a  restora- 
tion of  the  rate  to  perhaps  i8d.,  have  been  strongly  opposed  by  those 
who  monopolize  the  agricultural  properties,  as  well  as  by  employers, 

'  From  J.  Laurence  Laughlin,  "The  Strike  at  Iquique,"  Journal  of  Political 
Economy,  XVII,  641-43  (November,  1900^. 


MONEY  AND  PRICES  497 

such  as  the  producers  of  nitrate.  Nitrate  is  sold  abroad  for  gold;  and 
the  prices  in  the  world's  markets  have  been  falling  in  recent  years. 
Anything,  therefore,  which  would  increase  their  expenses  would  be 
vigorously  opposed  when  their  returns  were  being  reduced.  For  this 
reason  they  were  opposed  to  any  rise  of  wages.  Wages,  however, 
were  paid  in  paper  money;  and  a  customary  number  of  pesos  per  day 
were  always  expected  by  the  untutored  rotos,  without  much  regard  to 
what  the  paper  would  buy.  The  nitrate  officinas,  with  the  gold 
obtained  from  their  product,  could  obviously  get  more  pesos  in  paper 
money  at  the  rate  of  8d.  or  1 2d.  than  at  iSd.  That  is,  as  the  rate  went 
up,  their  labor  cost  them  more  relatively  to  the  price  of  nitrate  in  gold. 

The  laborer,  on  the  other  hand,  was  the  victim,  as  always,  of  a 
depreciating  standard.  As  the  paper  money  fell  in  value,  the 
importers  and  sellers  of  staple  articles  raised  their  prices.  Thus, 
without  an  understanding  of  the  monetary  principles  at  work,  the  poor 
roto  saw  only  that  his  customary  wages  in  paper  bought  for  him  less 
food  and  satisfactions.  He  was,  in  truth,  the  sufferer  from  a  vicious 
monetary  system,  kept  in  existence  for  the  selfish  gain  of  the  classes 
who  had  the  majority  in  Congress  and  who  indefinitely  postponed  the 
resumption  scheme  of  President  Montt.  The  roto,  however,  has  a 
quick  and  fiery  temper,  and  when  angered  he  stops  at  nothing.  This 
natural  turning  against  injustice  brought  on  the  pitiful  tragedy  at 
Iquique.  The  roto  flew  in  the  face  of  law  and  order;  and  by  the 
irony  of  fate  saw  the  force  which  had  brought  on  his  misery  also 
engaged  in  crushing  him  under  a  heel  of  iron. 

The  first  hint  of  impending  danger  came  from  the  Chinese,  who 
always  have  their  ears  to  the  ground;  but  their  fears  were  scouted. 
Then  one  morning,  suddenly,  20,000  strikers  from  the  officinas  on  the 
arid  pampas  came  pouring  over  the  yellow  sand  bluffs  down  into 
Iquique,  and  took  possession  of  the  city.  Houses  were  barricaded, 
and  the  city  was  left  in  the  hands  of  a  cruel  mob.  There  were  no 
troops  on  hand  to  cope  with  the- situation.  As  subsequent  events 
showed,  the  leading  citizens  were  marked  for  death,  and  the  city  was 
to  be  fired  simultaneously  in  many  different  places.  At  this  critical 
moment  soldiers  were  hurriedly  despatched  by  steamer  to  Iquique,  led 
by  an  ofl&cer  of  determination — and  Chilean  soldiers  are  good  fighters. 
The  rioters  were  maneuvered  into  a  city  square  where  they  were 
massed  about  a  church.  Ineffectual  efforts  were  made  to  induce  them 
to  disperse.  Instead  the  leaders  of  the  mob  only  responded  by  more 
fiery  speeches.    The  military  sent  word  that  they  would  fire  at  4 


498  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

o'clock,  if  the  rioters  had  not  then  dispersed.  This  was  received  with 
derisive  cheers,  when  4  o'clock  came  and  no  shot  was  fired.  The 
officer  then  took  out  his  watch  and  gave  them  five  minutes  in  which  to 
withdraw.  At  five  minutes  past  four  the  whir  of  the  mitrailleuse 
began.  Piles  of  dead  and  dying  were  heaped  up  in  a  moment.  Two 
hundred  were  killed  and  three  hundred  wounded;  and  the  rest  fled  up 
the  sand  bluffs  and  were  lost  to  sight  on  the  pampas.  Thus  the 
innocent  victims  of  a  wrongful  monetary  system  were  led  to  their  own 
destruction  by  a  perfectly  natural  revolt  against  injustice;  and 
another  crime  was  laid  at  the  door  of  a  fluctuating  standard  of  prices. 


XI.     CREDIT  AND  BANKING 

147.     CREDIT  INSTRUMENTS 

A  promissory  note  is  an  unconditional  written  promise  by  X  (the 
maker)  agreeing  to  pay,  either  on  demand  or  at  a  definite  future  date, 
a  sum  of  money  to  F  (the  payee)  or  to  F's  order  or  to  bearer.  It 
may  or  may  not  designate  the  place  at  which  payment  is  to  be  made. 
Promissory  notes  may  be  issued  by  institutions  and  governments  as 
well  as  by  individuals.  Bank  notes,  United  States  notes,  certificates 
of  deposit,  etc.,  are  forms  of  the  promissory  note. 

A   PROMISSORY   NOTE 


$500.00  Chicago,  January  11,  1910 

Six  months  after  date  I  promise  to  pay  to  the  order  of  Y  five  hundred 
dollars  with  interest  at  4  per  cent.     Value  received. 

X 


A  bill  of  exchange  is  an  unconditional  written  order,  signed  by  X 
(the  person  giving  the  order — the  drawer)  ordering  Z  (the  drawee) 
to  pay,  either  on  demand  or  at  a  definite  future  date,  a  sum  of  money 
to  Y  (the  payee)  or  to  F's  order  or  to  bearer.  The  drawee  may 
indicate  his  willingness  to  honor  it  by  signing  his  name  to  the  word 
"accepted"  written  across  the  face  of  the  bill. 

Banker's  bills,  banker's  drafts,  banker's  exchange,  or  cashier's 
checks  are  bills  drawn  by  one  banker  and  payable  by  another.  Com- 
mercial bills  are  those  growing  out  of  some  commercial  transaction, 
such  as  a  sale  of  goods. 

A   BILL   OF   EXCHANGE 


$500.00  '  Chicago,  January  10,  191 1 

At  sixty  days'  sight  pay  to  the  order  of  Y  five  hundred  doUars. 
Value  received.     Charge  to  the  account  of 

To  Z,  New  York  City  X 


In  order  to  illustrate  the  use  of  these  instruments,  suppose  that  X 
has  bought  a  bill  of  goods  from  F.   X  may  pay  in  one  of  several  ways: 

499 


SOO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

(i)  He  may  "pay  cash"  and  this  might  be  in  bank  notes,  United 
States  notes,  gold  certificates,  etc.  (2)  He  may  give  Y  a  check  on 
his  (X's)  bank.  (3)  He  may  draw  and  deliver  a  bill  of  exchange  on 
Z  payable  to  Y  or  to  F's  order.  In  such  a  case  Z  was  presumably  a 
debtor  to  X.  (4)  He  may  give  Y  a  promissory  note.  This  will  merely 
defer  actual  payment.  (5)  He  may  "accept"  a  bill  of  exchange 
which  Y  has  drawn  upon  him.  (6)  He  may  transfer  to  Y  some  check 
or  promissory  note  or  bill  of  exchange  which  some  other  person  (say,  V) 
has  drawn  to  X's  order  or  to  bearer.  (7)  He  may  buy  from  his  banker 
a  banker's  draft  or  cashier's  check  drawn  (on  some  other  banker)  in 
favor  of  F.     X  may  make  this  purchase  by  check  or  otherwise. 

If  X  is  in  New  York  and  Y  is  in  London  the  payment  is  likely  to 
take  place  in  one  of  the  following  ways:  (i)  X  may  buy  from  his 
banker  a  (banker's)  bill  of  exchange  drawn  on  some  London  bank. 
He  will  send  this  to  Y  who  will  collect  from  the  London  bank;  (2) 
if  Z,  in  London,  owes  X,  X  may  draw  a  bill  of  exchange  on  Z  in  favor 
of  Y.  He  will  send  this  to  Y  who  will  collect  from  Z.  (3)  Some  other 
person,  V,  in  New  York,  may  have  a  debtor,  W,  in  London.  V  may 
draw  on  W,  payable  to  T  or  to  bearer,  and  then  the  bill  may  be  sold 
in  the  open  market.  X  may  buy  this  in  the  market,  indorse  it  to 
the  order  of  F,  send  it  to  F  who  will  collect  from  W. 

148.    THE  USE  OF  CREDIT  INSTRURIENTS' 

I .  The  volume  of  business  that  can  be  done  by  credit  paper  depends 
on  several  circumstances.  Obviously,  in  the  first  place,  it  depends 
upon  the  banking  facilities  of  the  country.  If  the  banks  are  widely 
distributed,  if  they  are  willing  to  deal  in  transactions  small  enough 
to  be  within  the  reach  of  large  numbers  of  people,  many  more  trans- 
actions will  be  settled  through  them  than  would  otherwise  be  the  case. 
This  fact  undoubtedly  explains  in  large  measure  the  development 
of  what  may  be  called  the  "banking  habit"  among  the  people  of  the 
United  States.  Undoubtedly  our  people  pay  by  check  much  more 
commonly  and  much  more  largely  than  people  of  any  other  country. 

In  the  next  place,  the  density  of  population  is,  of  course,  an  impor- 
tant factor  in  the  growth  of  credit  exchanges.  A  larger  volume  of 
business  is  settled  by  bank  paper  in  a  commercial  center  than  in  an 
agricultural  community,  even  though  the  proportion  of  total  business 
thus  settled  may  not  be  larger. 

'  Adapted  from  David  Kinley,  Use  of  Credit  Instruments  in  Payments  in  the 
United  Slates,  passim.     National  Monetary  Commission,  igio- 


CREDIT  AND  BANKING 


501 


Finally,  the  general  education  and  intelligence  of  the  mass  of  the 
people  is  an  important  factor.  Men  do  not  use  banks  unless  they  have 
confidence  in  them,  and  they  have  come  to  be  regarded  as  a  settled 
part  of  the  ordinary  commercial  mechanism  of  the  community. 

2.  It  is  very  clear  that  a  large  proportion  of  the  business  of  the 
country,  even  in  the  retail  trade,  is  done  by  means  of  credit  instru- 
ments. We  are  justified  in  concluding  that  50  or  60  per  cent  of  the 
retail  trade  of  the  country  is  settled  in  this  way.    Over  90  per  cent 


DIAGRAM  OF  THE  PEBCEHTAOE  OP  CHECKS  IN  RETAIL  DEPOSITS  BY  CLASSES  OF  BANKS. 

*                            10                           ^0                           M                           no                           M                            W                           ta                          SO                           Oa                          U   J 

l^ 

T<rt»t.%.... 

DIAORAM  or  THE  PEBCENTAOE  OF  C 
'»                JO              30                 1i 

ETECKS  IN  HETAa  DEPOSITS                                                | 
2 ,   iC           _   7.0  .    _        to              ^?               \ 

S.  Atlantic  Div 

N.OtitralDiv 

■^ 

Westefii  Div 

TotAl 

NAiionaf  banks  .-c-»b«-. . 

StaW  b«aks  . 

Private  banks. ....... 

Luto    and    truit    com- 

panits 

Stock  uvinss  banks 

Mutual  savings  basks. . 


Toul. 


DUORAM  or  TKE  PEEOENTiOE  OP  CHXOKS  IH  WHOLESALE  ^   DEPOSITS                                         1 
If                13                  U)                 fc                   tJ                7/;                  to                 ?».                1 

_^ 



1 

PIAOBiM  or  THE  PERCENTAOE  OP  CHECKS  IN  AOOBEOATE  DEPOSITS  BY  CLASSES 

e        __    jp  _           3.1              -.a               SB               iff              "3               i 

OP  BANKS. 

J                  «... 

.1 

Buubuto 

Ptinubuki 

Mvnial  artiv*  buiV- 

of  the  wholesale  trade  of  the  country  is  done  with  checks  and  other 
credit  documents.  We  may  therefore  safely  accept  an  average  of 
8o  to  85  per  cent  as  the  probable  percentage  of  business  of  this  country 
transacted  by  check. 

3,  The  amount  of  money  released  by  our  credit  transactions  is 
not  equal  in  amount  to  the  volume  of  credit  instruments,  for  there 
must  always  be  enough  to  settle  the  uncanceled  balances  called  for 
in  money  from  day  to  day.     The  amount  of  money  displaced  is  the 


502  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

difiference  between  the  amount  that  would  be  needed  in  a  purely 
money  regime  and  the  amount  needed  to  pay  the  uncanceled  balances 
of  the  credit  transactions.  It  is  important  to  note  that  an  increase 
in  the  volume  of  credit  transactions  does  not  necessarily  mean  that 
we  must  get  a  proportionate  increase  in  our  reserve  of  money.  Every 
refinement  of  the  credit  mechanism  makes  it  possible  to  do  a  larger 
volume  of  business  on  the  same  reserve. 

No  one  cari  say,  therefore,  with  definiteness  what  is  the  amount  of 
money  released  if  75  or  80  per  cent  of  our  business  transactions  are 
settled  by  means  of  credit  paper.  This  is  a  matter  in  which  the  long 
experience  of  practical  bankers  is  the  only  safe  guide,  because  the 
amount  in  question  is  changing  from  day  to  day  as  the  conditions 
change.  No  simple  rule  about  it  can  be  laid  down.  Certainly, 
however,  it  is  not  75  per  cent  of  the  money  which  would  be  necessary 
if  all  transactions  were  settled  with  money.  It  is  an  amount  varying 
from  one-third  to  one-fifth  of  uncanceled  credit  balances,  according 
to  the  perfection  of  the  banking  machinery,  the  state  of  credit,  pros- 
perity, and  public  confidence. 

4.  This  demand  for  reserve  has  an  influence  in  determining  the 
value  of  money,  just  as  has  the  demand  for  money  for  direcc  pay- 
ment. 

5.  The  fact  that  so  large  a  proportion  of  business  is  done  with 
credit  paper  may  or  may  not  be  a  good  thing.  Whether  it  is  or  not 
depends  on  circumstances.  If  any  part  of  the  country  is  compelled 
to  use  checks  because  of  the  lack  of  currency,  when  it  would  prefer 
the  latter,  the  situation  is  an  evil. 

In  the  next  place,  the  settlement  of  a  very  large  proportion  of 
exchanges  by  means  of  credit  paper  introduces  a  delicacy  of  character 
into  the  trading  mechanism  of  a  community  which  may  cause  it  to 
be  more  easily  upset.  The  larger  the  volume  of  credit  settlements 
in  proportion  to  the  volume  of  money  settlements,  the  greater  the 
panic  when  confidence  breaks  down  and  the  balance  of  canceled  credit 
transactions  thereby  is  made  larger.  A  breakdown  of  confidence 
means  an  increase  in  the  amount  of  transactions  that  must  be  settled 
by  ready  money.  Therefore  it  is  not  a  safe  condition  for  the  country 
to  have  the  amount  of  actual  money  so  small  for  its  retail  transactions 
that,  when  confidence  fails,  the  strain  on  it  will  be  severely  felt.  It 
would  be  better  for  the  country  to  have  a  smaller  volume  of  credit 
transactions  and  a  larger  volume  of  direct  money  payments.  If 
the  habits  of  the  people  preclude  this,  then  there  ought  to  be  some 
means  of  supplying  additional  currency  when  credit  as  a  means  of 


CREDIT  AND  BANKING  503 

payment  diminishes.  This  currency  ought  to  be  as  safe  and  as 
uniform  as  the  ordinary  currency  and  it  should  be  capable  of  being 
quickly  emitted  and  recalled.    That  is,  it  should  possess  elasticity. 

6.  Such  evidence  as  there  is  seems  to  indicate  that  payment  by 
check  has  shown  an  increase  during  the  past  few  years: 

a)  In  the  first  place,  the  returns  of  our  reports  show  a  larger  per- 
centage in  retail  trade. 

b)  The  prosperity  of  the  farmers  in  the  Central  West  has  enabled 
many  to  have  bank  accoimts  who  fifteen  years  ago  could  not  carry 
balances. 

c)  The  third  evidence  is  found  in  the  growth  of  the  number  of  small 
banks,  especially  in  the  country  districts.  Since  national  banks  have 
been  permitted  to  establish  themselves  with  a  capital  of  $25,000  their 
number  has  increased  from  3,617  to  6,926. 

d)  The  appearance  of  a  considerable  proportion  of  checks  in  the 
deposits  of  mutual  savings  banks  is  also,  to  some  degree,  significant. 
Of  course  the  credit  documents  received  in  the  deposits  of  these  banks 
may  be  to  a  considerable  extent  money  orders.  Nevertheless  their 
deposits  show  a  certain  use  of  credit  paper  by  the  patrons  of  these 
banks. 

We  cannot  expect  any  social  movement  to  continuesteadily  in  one 
direction  for  an  indefinite  time.  Such  evidence  as  inquiries  of  this 
character  furnish  seems  to  show  that  there  is  a  certain  ebb  and  flow 
in  the  proportion  of  checks  used  in  business  payments. 

The  volume  of  credit  transactions  very  likely  tends  to  increase 
as  population  and  business  grow.  It  does  not  increase  uniformly, 
however,  but  by  periodic  movements.  That  is  to  say,  the  rate  of 
increase  of  credit  transactions,  as  compared  with  the  whole  volume 
of  business,  grows,  as  it  were,  by  jerks  and  at  a  decreasing  rate. 

One  point  needs  to  be  carefully  borne  in  mind.  However  great 
the  volume  of  credit  exchanges,  however  extensive  the  use  of  credit 
may  become  in  a  community,  they  can  never  fully  displace  sales  for 
direct  money  payment. 

149.    THE  CLEARING-HOUSE* 

I.    ORGANIZATION  AND   FUN/CTIONS 

A  clearing-house  may  be  defined  as  a  device  to  simplify  and  facili- 
tate the  daily  exchanges  of  items  and  settlements  of  balances  among 
the  banks  and  a  medium  for  united  action  upon  all  questions  affecting 

'  Adapted  from  J.  G.  Cannon,  Clearing  Houses,  pp.  1-131.  National  Monetary 
Commission,  iqio. 


504  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

their  mutual  welfare.  The  tendency  has  been  marked,  especially 
in  recent  years,  to  include  within  the  legitimate  field  of  clearing-houses 
all  questions  affecting  the  mutual  welfare  of  the  banks  and  the  com- 
munity as  a  whole.  They  are  gradually  becoming  a  welding  force 
that  ultimately  will  bring  to  the  banking  business  of  this  country  the 
centralization  which  it  so  greatly  needs. 

The  exchange  of  items  between  the  banks  accomplishes  two 
results:  First,  it  places  at  the  proper  banks  for  payment  the  items  to 
be  exchanged  which  the  several  banks  hold;  and,  second,  it  determines 
the  difference  between  the  amount  of  the  items  held  by  each  bank 
against  all  the  others  and  the  amount  held  by  all  the  other  banks 
against  each  individual  bank.  The  difference  constitutes  the  balance 
which  is  to  be  settled.  The  clearing-house  acts  merely  as  the  agent 
of  the  banks  in  the  payment  of  the  balances.  It  pays  to  the  creditor 
banks  the  money  it  receives  from  the  debtor  banks. 

The  government  of  a  clearing-house  association  in  the  United 
States  is,  theoretically,  vested  in  a  president,  vice-president,  secretary, 
treasurer,  manager,  and  a  clearing-house  committee,  sometimes  termed 
"committee  of  management"  or  "executive  committee."  Not  every 
association,  however,  is  as  completely  ofl5cered  as  this;  in  fact,  there 
are  many  associations  that  do  not  have  the  full  list  of  oflficials  named. 
A  president,  a  manager,  and  an  executive  committee,  however,  are 
found  in  the  organization  of  nearly  every  clearing-house  association, 
for  these  functionaries  are  practically  indispensable. 

The  clearing-house  association  holds  an  annual  meeting  for  the 
purpose  of  electing  officers  and  committees  and  for  the  transaction 
of  other  business.  The  quorum  is  usually  fixed  at  a  majority  of  all 
the  associated  banks.  In  some  instances,  however,  it  is  fixed  at  two- 
thirds,  and  in  a  few  cases  even  as  low  as  one-third,  of  all  the  members. 
Sometimes  a  specified  number  is  designated  as  constituting  a  quorum. 
Each  bank  is  expected  to  be  represented  at  the  annual  meeting  by 
one  or  more  of  the  officers,  but  usually  is  allowed  only  one  vote. 

The  location  of  the  clearing-house  is  always  as  near  the  center  of 
the  banking  district  as  possible.  It  is  especially  important  that  this 
should  be  so  in  a  large  city,  where  the  banks  are  numerous  and  often 
scattered  over  a  considerable  area.  None  of  the  associations,  except 
the  one  at  New  York,  owns  its  clearing-house  property.  Instead,  the 
various  organizations  occupy  rented  quarters,  usually  in  one  of  the 
banks  belonging  to  the  association,  and  these  they  have  equipped 
with  the  necessary  furniture,  stationery,  and  desks  for  the  various 
members. 


CREDIT  AND  BANKING  505 

The  desks  are  sometimes  arranged  in  straight  rows,  and  sometimes 
in  elliptical  curves,  and  in  a  few  cases  they  are  placed  like  the  desks 
in  a  schoolroom.  It  is  not  uncommon  in  small  places  for  the  clerks 
to  meet  and  make  their  exchanges  around  a  table,  and  occasionally 
the  same  rule  prevails  in  large  centers. 

Each  clearing-house  determines  for  itself  the  time  when  its  daily 
exchanges  shall  be  made,  and  as  practically  the  only  criterion  in  select- 
ing an  hour  is  the  convenience  of  the  several  members,  it  is  not 
surprising  that  there  is  a  wide  diversity  among  associations  in  this 
regard. 

The  rules  regulating  the  kinds  of  matter  to  be  cleared  are  by  no 
means  uniform.  A  number  of  organizations  specify  in  their  articles 
of  association  what  shall  be  considered  proper  clearing  matter.  With 
but  two  exceptions,  the  exchanges  passing  through  the  clearing-house 
are  confined  to  items  drawn  upon  members  or  upon  non-members 
clearing  through  members.  That  is  to  say,  checks  and  drafts  received 
by  a  bank  member  of  a  clearing-house  in  any  city  drawn  upon  another 
member  of  the  same  clearing-house,  from  whatever  source  the  checks 
may  have  been  received,  are  liqmdated  through  the  clearing-house;  but 
checks  and  drafts  received  by  a  member  of  a  clearing-house  drawn 
upon  some  bank  located  at  a  distance,  and  not  a  member,  nor  clearing 
through  a  member,  are  regarded  as  improper  matter  for  clearing. 

The  number  of  messengers  required  to  transport  the  exchanges  to 
and  from  the  clearing-house  varies  widely  in  different  cities.  When 
the  business  is  Ught,  as  in  some  of  the  smaller  cities,  one  person  acts 
as  both  messenger  and  settling  clerk,  while  in  some  of  the  larger  cities 
the  exchanges  of  some  of  the  banks  are  so  heavy  that  four  or  five 
messengers  are  necessary  to  transport  them. 

Checks  are  taken  to  the  clearing-house  bound  together  with  rubber 
bands  or  inclosed  in  large  envelopes,  the  items  that  go  to  each  of  the 
members  being  kept  separate.  If  the  bulk  is  not  too  great,  they  are 
often  carried  in  the  hand,  but  it  is  customary  in  the  large  cities  to 
transport  them  in  leather  bags  or  cases. 

The  usual  rule  is  that  immediately  upon  his  arrival  at  the  clearing- 
house the  settling  clerk  delivers  to  the  manager,  or  the  assistant 
manager,  a  ticket  containing  the  amount  of  the  items  brought  from 
his  bank. 

Two  methods  of  deHvering  items  in  the  exchange  room  are  in 
vogue.  In  the  one  case  they  are  delivered  by  all  the  clerks  simul- 
taneously;  in  the  other  by  each  clerk  as  soon  as  he  arrives  at  the 


So6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

clearing-room;  but  the  exchanges  must  all  be  made  before  a  specified 
time. 

When  the  clerks  begin  the  exchanges  at  the  same  time  they  all 
start  upon  the  signal  from  the  manager  with  their  items  on  their 
arms  or  in  bags  or  cases  strapped  over  the  back,  and  proceed  in  the 
same  direction,  passing  along  the  desks  until  they  have  deposited  all 
their  paper.  In  the  large  cities,  where  the  clerks  are  numerous,  order 
and  method  are  necessary  in  delivery  to  prevent  confusion  and  to 
save  time.  But  in  small  cities,  where  the  clerks  usually  deliver  their 
items  as  soon  as  they  arrive,  more  liberty  is  allowed  in  personal  con- 
duct; also  by  this  method  an  opportunity  is  afforded  to  the  less  pro- 
ficient clerks  to  arrive  early  and  list  their  items  as  fast  as  they  are 
delivered  to  them  from  the  other  banks. 

When  the  clearings  have  been  made,  the  next  step  is  for  each 
settling  clerk  to  determine  the  amount  of  the  balance  of  his  own  bank, 
which  is  found  by  taking  the  difference  between  the  amount  brought 
to  the  clearing-house  and  the  amount  taken  away.  A  certain  amount 
of  time  is  allowed  for  the  proof.  In  some  cases  the  settling  clerks  do 
not  remain  until  the  proof  is  made,  but  leave  for  their  respective  banks 
as  soon  as  they  make  out  their  tickets  for  the  amounts  brought, 
amounts  received,  and  balances.  If  the  manager  of  the  clearing- 
house, or  his  assistant  in  charge  of  the  proofsheet,  finds,  after  he  has 
made  all  the  entries  and  additions,  that  his  work  does  not  prove,  he 
first  determines  whether  the  error  was  made  by  one  of  the  settling 
clerks  or  by  himself.  If  by  one  of  the  clerks,  it  is  usually  discovered 
in  a  short  time  at  the  bank,  whereupon  the  latter  reports  the  error 
to  the  manager  at  the  clearing-house,  either  by  messenger  or  by  tele- 
phone. If  the  bank  fails  to  report  the  error  in  due  time,  the  manager 
takes  the  debit  and  credit  slips  and  finds  it. 

The  speed  with  which  the  business  of  a  clearing-house  is  trans- 
acted seems  almost  incredible.  The  actual  time  required  to  make  the 
exchanges  varies  from  one  and  one-half  minutes  to  ten  minutes. 
When  the  exchanges  are  made  simultaneously,  the  time  varies,  as  a 
rule,  in  proportion  to  the  number  of  members.  In  view  of  the  short- 
ness of  time  required  to  make  its  exchanges,  the  New  York  Clearing- 
House  affords,  perhaps,  the  best  example  in  existence  of  the  success 
of  modern  business  methods  as  compared  with  the  old  way  of  doing 
things.  The  clearances  exceed  on  the  average  $300,000,000,  and  yet 
this  enormous  amount  of  paper  is  exchanged  between  the  banks  in 
ten  minutes,  and  often  in  less  time. 


CREDIT  AND  BANKING  507 

The  clearing-houses  in  the  United  States  may  be  divided  into  two 
classes,  the  sole  function  of  the  first  of  which  consists  in  clearing  notes, 
drafts,  checks,  bills  of  exchange,  and  whatever  else  may  be  agreed 
upon,  and  the  second  of  which,  in  addition  to  exercising  the  functions 
of  the  class  just  mentioned,  prescribes  rules  and  regulations  for  the 
control  of  its  members  in  various  matters.  The  most  important  of 
the  special  functions  of  a  clearing-house  are  (a)  the  extending  of  loans 
to  the  government,  (b)  mutual  assistance  of  members,  (c)  fixing  imi- 
form  rates  of  interest  on  deposits,  (d)  fixing  uniform  rates  of  exchange 
and  of  charges  on  collections,  and  (e)  the  issue  of  clearing-house  loan 
certificates. 

Clearing-houses  may  also  be  divided  into  two  classes  with  reference 
to  the  funds  used  in  the  settlement  of  balances:  First,  those  clearing- 
houses which  make  their  settlements  entirely  on  a  cash  basis,  and 
second,  those  clearing-houses  which  make  their  settlements  on  some 
other  basis.  There  are  no  less  than  five  different  methods  of  settling 
balances,  in  whole  or  in  part,  without  the  use  of  money  at  the  clearing- 
house. They  are  (i)  by  manager's  check  on  debtor  banks  given  to 
creditor  banks;  (2)  by  borrowing  and  loaning  balances  without  inter- 
est; (3)  by  borrowing  and  loaning  balances  with  interest;  (4)  by  the 
use  of  one  or  more  of  four  forms  of  certificates,  viz.,  gold  and  currency 
depository  certificates.  United  States  assistant  treasurer  certificates, 
and  clearing-house  loan  certificates;  and  (5)  by  draft  on  another  city. 

Generally  speaking,  about  40  per  cent  of  the  clearing-houses  of 
the  United  States  use  drafts  on  other  cities  in  paying  their  balances. 
About  30  per  cent  settle  by  manager's  check,  and  about  25  per  cent 
settle  by  cash  alone,  the  remaining  5  per  cent  settling  by  a  combination 
of  two  or  more  of  the  foregoing  methods. 

Any  kind  of  United  States  money  is  acceptable  in  most  of  the  small 
clearing-houses;  but  in  a  majority  of  the  large  ones  certain  kinds  of 
money  are  not  acceptable. 

II.      CLEARING-HOUSE   LOAN   CERTIFICATES 

Clearing-house  certificates  are  of  two  kinds — those  issued  upon  the 
deposit  of  gold  coin  (and  in  New  York  City  and  Boston  on  gold  and 
silver  certificates  and  legal-tender  notes)  and  those  issued  upon  the 
deposit  of  collateral  securities.  The  former  are  employed  in  ordinary 
times  solely  as  a  method  of  economizing  time  and  labor  and  reducing 
risk  in  handling  large  sums  of  money.  The  latter  are  employed  in 
times  of  financial  disturbance  or  panic,  and  although  both  are  intended 


5o8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

for  use  solely  in  the  settlement  of  balances  at  the  clearing-house,  the 
circumstances  that  call  them  forth,  the  results  effected  by  their  use, 
and  the  part  they  play  in  banking  economy  have  little  or  nothing  in 
common.  The  certificates  issued  upon  the  deposit  of  gold,  etc.,  are 
termed  "Clearing-house  certificates,"  and  those  issued  upon  the 
deposit  of  collateral  security  are  very  properly  termed  "  Clearing-house 
loan  certificates,"  with  which  latter  only  are  we  here  concerned. 

Clearing-house  loan  certificates  may  be  defined  as  temporary  loans 
made  by  the  banks  associated  together  as  a  clearing-house  association, 
to  the  members  thereof,  for  the  purpose  of  settling  clearing-house 
balances.  Such  certificates  are  negotiable,  as  a  rule,  only  among  the 
members  of  the  association,  and  are  not  in  any  sense  to  be  regarded  as 
currency.  They  are  not  even  seen  by  the  business  community,  and 
do  not  pass  from  bank  to  bank  except  in  payment  of  clearing-house 
balances. 

The  great  value  of  clearing-house  loan  certificates  lies  in  the  fact 
that  they  take  the  place  of  money  in  settlements  at  the  clearing-house, 
and  hence  save  the  use  of  so  much  actual  cash,  leaving  the  amount  to 
be  used  by  the  banks  in  making  loans  and  discounts,  and  in  meeting 
other  obligations.  The  volume  of  currency,  to  all  intents  and  pur- 
poses, is  expanded  by  this  means  to  the  full  amount  of  the  certificates 
issued.  When  the  stringency  in  the  money  market  seems  sufficient 
to  demand  it,  the  clearing-house  association  meets  and  appoints  a 
committee  called  the  "loan  committee,"  consisting  usually  of  five 
bank  officers,  to  act  in  concurrence  with  the  president  of  the  clearing- 
house association,  who  serves  ex  officio  as  a  member.  It  is  the  duty  of 
such  committee  to  meet  each  morning  at  the  clearing-house  and  exam- 
ine the  collateral  offered  as  security  by  the  banks  and  issue  loan 
certificates  thereon,  in  such  denominations  and  proportions  to  col- 
laterals deposited  as  may  be  agreed  upon.  In  the  past  the  denomina- 
tions have  varied  from  25  cents  to  $100,000  in  the  different  associations 
and  in  proportions  varying  from  $50  to  $100  of  certificates  to  $100  of 
collateral  deposited. 

These  loan  certificates  bear  interest  at  rates  varying  from  5  to  10 
per  cent  per  annum,  payable  by  the  banks  to  which  they  are  issued 
to  the  banks  receiving  such  certificates  in  settlement  of  daily  balances. 
The  aim  is  to  fix  the  rates  sufficiently  high  to  insure  the  retirement  of 
the  certificates  as  soon  as  the  emergency  which  called  them  forth  has 
passed  by. 

It  is  by  no  means  the  general  practice  for  all  the  members  to  take 
out  loan  certificates  when  issues  are  arranged  by  the  association. 


CREDIT  AND  BANKING  S°9 

The  total  amount  of  its  balances  is  not  always  paid  in  clearing-house 
loan  certificates  by  a  bank  to  which  such  certificates  have  been  issued. 
Some  banks  are  in  such  condition  as  to  be  able  to  weather  the  storm 
without  them,  while  others  are  weak  and  in  great  need  of  relief. 

in.      CLEARING-HOUSE    LOAN    CERTIFICATES    USED    AS    CURRENCY 

Two  things  are  characteristic  of  the  Atlanta  certificates  [of  1893] 
which  are  not  to  be  found  in  any  of  those  [previously  issued].  In 
the  first  place  they  were  issued  to  the  extent  of  only  66f  per  cent 


1 


50c. 
BIRMINGHAM  CLEARING-HOUSE  CERTIFICATE 

2       No Birmingham,  Ala 1893 

This  Certifies  that  the Bank, 

of  Birmingham,  Ala.,  has  deposited  with  the  undersigned  Committee 
of  the  Birmingham  Clearing-House,  securities  to  the  value  of  One 
Dollar,  to  secure  to  the  bearer  hereof  the  payment  of  the  sum  of 
Fifty  Cents,  in  lawful  money  of  the  United  States,  payable  at  any 
time  after  ninety  days  from  date  hereof. 

This  Certificate  will  be  received  on  deposit  by  any  Bank  or  Banker 
of  the  Birmingham  Clearing-House  at  par. 

Countersigned:  


Cashier  Commiitee 


Form  of  Clearing-House  Loan  Certificate  Used  in  Birmingham,  Ala. 

of  the  collateral  deposited  as  compared  with  a  minimum  of  75  per 
cent  in  the  other  associations;  and  in  the  second  place  it  [was  stated] 
on  the  certificates  that  they  "will  be  received  on  deposit  or  in  payment 
of  debts  due  any  bank  in  said  clearing-house" — an  implication  that 
they  were  used  for  general  circulation,  which,  indeed,  is  true.  [The 
denominations  were  $5,  $10,  $100,  and  $500.] 

In  June,  1893,  the  Clearing-House  Association  at  Birmingham 
recommended  the  use  of  clearing-house  loan  certificates.  Like  the 
certificates  in  Atlanta,  they  were  intended  for  general  circulation 
among  the  customers  of  the  banks,  but,  unlike  any  certificates  pre- 
viously mentioned,  they  were  issued  to  the  extent  of  only  50  per  cent 
of  the  collateral  required.  The  denominations  first  used  were  $1,000, 
$500,  $100,  $50,  $10,  and  $5.  Certificates  of  $2,  $1,  50  cents,  and 
25  cents  were  subsequently  issued.  No  other  association  in  the 
United  States  had  previously  compared  with  the  one  at  Birmingham 


5IO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in  the  comprehensiveness  of  its  currency  system  and  in  the  extent  to 
which  it  was  projected  on  this  occasion. 

In  1893,  there  was  a  considerable  amount  of  emergency  circula- 
tion taken  out  by  the  banks  in  the  Southeast,  under  the  title  of  "clear- 
ing-house certificates,"  in  cities  where  no  clearing-houses  existed. 
In  adopting  the  name  of  clearing-house  certificates,  it  was  not  the 
purpose  of  the  banks  to  practice  deception  on  the  people,  but  to 
indicate  what  was  really  true  and  what  the  term  would  seem  to  im- 
ply, namely,  that  such  certificates  were  temporary  loans  made  by  the 
banks  associated  together,  and  that  the  banks  were  pledged  for  their 
redemption. 


No.  596  BALTIMORE  CLEARING-HOUSE 

Baltimore, 18 

This  is  to  Certify: 

That  the 

has  deposited  with  the  Committee  appointed  by  the  Associated 
Banks  on  June  24th,  1893,  Approved  Securities,  which  are  held  as  a 
Special  Deposit  to  secure  the  redemption  of  this  Certificate  in  com- 
pliance with  resolutions  adopted  by  said  Banks  on  the  day  above 
named. 

This  Certificate  will  be  received  for  the  sum  of  One  Thousand 
Dollars  without  endorsement,  in  settlement  of  balances  resulting 
from  the  exchanges  between  the  Banks,  will  bear  interest  at  the  rate 
of  six  per  cent  per  annum  until  redeemed,  and  wUl  be  negotiable 
only  between  the  Associated  Banks. 

$1 ,000  Manager 


Form  of  Clearing-House  Loan  Certificate  Used  in  Baltimore 

On  October  26,  1907,  the  same  day  on  which  the  New  York 
association  took  its  action,  the  Clearing-House  Association  at  Chicago 
met  and  passed  resolutions  authorizing  the  issue  of  clearing-house 
loan  certificates,  under  conditions  very  similar  to  those  governing 
their  issue  by  other  large  cities.  The  certificates  were  issued  under 
the  supervision  of  the  clearing-house  committee  to  the  extent  of  75 
per  cent  of  the  market  value  of  the  collateral  deposited  and  bore 
interest  at  the  rate  of  7  per  cent. 

[By  resolutions  passed  November  6  and  13,  1907,  the  Chicago 
Clearing-House  Association  provided  for  the  issue  of  clearing-house 
checks,  as  follows:] 

"Any  bank,  being  a  member  of  the  Chicago  Clearing-House  Associ- 
ation, may  at  any  time  surrender  to  the  clearing-house  committee 
any  loan  certificate  held  by  it  which  was  issued  under  said  prindpai 


CREDIT  AND  BANKING  511 

agreement  of  October  29,  1907,  to  any  member  of  the  association  and 
receive  in  lieu  thereof  checks  to  the  amount  of  the  principal  thereof 
in  denominations, of  $1,  $2,  $5,  and  $10,  as  desired,  drawn  by  or  under 
the  direction  of  the  clearing-house  committee  on  the  following  banks 
designated  for  that  purpose,  viz.,  the  First  National  Bank,  the  Corn 
Exchange  National  Bank,  the  Continental  National  Bank,  and  the 
Commercial  National  Bank,  and  made  payable  through  the  Chicago 
clearing-house  or  to  the  bank,  or  bearer,  applying  therefor,  as  afore- 
said, which  checks  shall  not  draw  interest." 


This  Check  Is  Payable  Only  through  the  Chicago  Clearing-House  and 
Must  Be  Collected  through  a  Bank 


THIS 

CHECK 

IS   FOR 

TEN 
DOLLARS 


Chicago,  November  nth,  1907  No.  D  14800  i 

CHICAGO  CLEARING-HOUSE  ASSOCIATION 

Pay  to  Continental  National  Bank  or  hearer  $10  Aft, 

Ten  and  iVo Dollars 

Manager 


To 


The  First  National  Bank  of  Chicago  Assistant  Secretary 

This  Check  Is  Protected  by  Securities  Deposited  with  the  Chicago 
Clearing-House  Association 


Form  of  Clearing-Hotjse  Check  Used  m  Chicago 

Thus  it  will  be  seen  that  the  Chicago  Clearing-House  Association 
issued  checks  in  amounts  of  $1,  $2,  $5,  and  $10  designed  for  general 
circulation,  to  the  extent  of  about  $7,500,000,  secured  by  clearing- 
house loan  certificates,  which  in  turn  were  secured  by  133  per  cent  of 
good  collateral.  The  aggregate  amount  of  clearing-house  loan  certifi- 
cates issued  in  Chicago  was  $39,240,000,  and  the  maximum  amount 
outstanding  was  $38,285,000  on  December  18,  1907. 

[In  1907]  many  of  the  clearing-houses  of  the  country  issued  clearing- 
house checks,  or  cashier's  checks,  generally  under  proper  safeguards, 
in  small  denominations,  which  were  intended  for  general  use,  to  take 
the  place  of  cash  temporarily  withdrawn  from  circulation. 

[In  Canton,  Ohio,]  clearing-house  checks,  or  cashier's  checks, 
payable  to  bearer  through  the  clearing-house  only,  in  amounts  of  $1, 
$2,  $5,  and  $10,  were  issued  to  the  extent  of  about  $200,000.  These 
checks  had  no  collateral  security  back  of  them,  and  were  accepted 
purely  on  the  responsibility  of  the  issuing  bank.  A  specimen  of  this 
check  is  shown  herewith. 


512 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


$5.00 

Canton,  Omo,  November 
Pay  to  the  Bearer 
FIVE  DOLLARS    FIVE  DOLLARS    $5.00 

II, 

1907 

Payable 

only  through  the  Canton  Clear ing-House. 

The  City  National  Bank 

Cashier 

Form  of  Clearing-House  Check  Used  at  Canton 

Most  of  the  clearing-houses  that  issued  both  clearing-house  loan 
certificates  and  clearing-house  checks  secured  the  checks  by  the  deposit 
of  loan  certificates,  which  were  secured  by  collateral,  but  at  Los 
Angeles  both  the  loan  certificates  and  the  scrip  were  directly  secured 
by  collateral,  the  former  to  the  extent  of  133  per  cent,  and  the  latter 
by  securities  valued  at  200  per  cent  of  the  amount  issued. 

ISO.    THE  JOURNEY  OF  A  CHECK' 

The  check,  which  was  for  $43.56,  was  drawn  by  Woodward 
Brothers,  of  Sag  Harbor,  N.Y.,  and  paid  to  Berry,  Lohman  &  Rasch, 
of  Hoboken,  N.J.,  who  deposited  it  in  the  Second  National  Bank  of 
Hoboken.  This  bank  sent  it  to  Harvey  Fisk  &  Sons,  of  New  York, 
who,  having  no  regular  correspondent  in  the  neighborhood  of  the  bank 
on  which  it  was  drawn,  sent  it,  along  with  other  collections,  to  their 
Boston  correspondent,  the  Globe  National  Bank.  The  Globe 
National  Bank  of  Boston,  for  reasons  that  are  not  apparent,  sent  it, 
presumably  with  other  items,  to  its  correspondent  at  Tonawanda, 
N.Y.,  viz.,  the  First  National  Bank  of  that  city.  The  Tonawanda 
bank,  evidently  realizing  that  the  check  had  wandered  far  out  of  its 
course,  and  in  an  effort  to  get  it  nearer  home,  transmitted  it  to  the 
National  Exchange  Bank  of  Albany,  which  institution,  pursuing  the 
same  commendable  policy,  remitted  it  to  its  correspondent  at  Port 
Jefferson.  The  First  National  Bank  of  Port  Jefferson,  which  thus  got 
possession  of  the  check,  again  diverted  its  course  by  inclosing  it  to  the 
Far  Rockaway  Bank.    The  Far  Rockaway  Bank  sent  it  back  to  New 

« Adapted  from  J.  G.  Cannon,  Clearing  Houses,  pp.  7<>-74-  National  Mone- 
tary Commission,  1910. 


CREDIT  AND  BANKING  513 

York,  to  the  Chase  National  Bank,  and  thus  this  much-traveled  check 
made  its  second  call  in  the  metropolis.  The  Chase  National  Bank, 
it  would  appear,  endeavored  to  correct  the  wanderer's  course,  and 
so  dispatched  it  to  Riverhead,  to  H.  M.  Reeve.  Mr.  Reeve,  either 
because  he  really  knew  where  to  send  it  for  collection,  or  because  of 
a  lucky  hit,  forwarded  it  to  the  Queens  County  Bank  of  Brooklyn, 
which  finally  sent  it  home  to  the  Peconic  Bank  of  Sag  Harbor,  on 
which  it  was  drawn. 

The  reason  why  banks  forward  checks  in  this  apparently  unreason- 
able way,  often  getting  the  items  far  out  of  their  regular  course,  is  easy 
to  explain.  It  sometimes  appears  cheaper  to  the  bank  which  has  the 
check  in  hand  to  inclose  it  with  other  items  to  some  regular  corre- 
spondent, which,  assumedly,  is  nearer  the  bank  on  which  the  check  is 
drawn,  than  to  hunt  up  a  special  correspondent  for  it  alone.    Once 


started,  the  poor  check  gets  pushed  along  from  station  to  station,  on 
its  erratic  course,  until  such  time  as,  by  accident  or  otherwise,  it  finds 
its  final  lodgment. 

The  reader  may  estimate  for  himself  the  volume  of  correspondence 
which  this  one  check  caused,  from  the  time  it  was  drawn  by  Woodward 
Brothers  until  it  was  paid  by  the  Peconic  Bank,  and  the  amount  of 
postage  and  cost  of  clerical  work  expended  upon  it.  No  better 
argument  than  the  facts  here  presented  is  needed  to  support  the  propo- 
sition of  charging  a  reasonable  sum  for  collecting  out-of-town  checks. 
No  better  illustration  than  this  could  be  presented  to  the  business  man 
for  demonstrating  to  him  the  weight  of  the  burden  he  puts  on  the 
banking  machinery  of  the  community  by  remitting  his  check  on  a 
country  bank,  in  payment  of  an  account,  instead  of  purchasing 
exchange. 


514  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

151.    WEEKLY  STATEMENT  ISSUED  BY  THE  FEDERAL 
RESERVE  BOARD  ON-  JUNE  12,  19 15' 

A  gain  of  over  13  million  dollars  in  the  cash  reserves,  of  3 . 7  in  the 
gold  reserves,  and  a  decrease  of  about  8  million  dollars  in  the  amount 
of  short-term  municipal  paper  held  is  indicated  by  the  weekly  state- 
ment of  the  condition  of  each  of  the  Federal  Reserve  banks  and  the 
consolidated  statement  for  the  system  as  a  whole  as  at  close  of  business 
on  June  11,  1915. 

The  largest  increase,  of  5 .  i  million  dollars,  in  its  gold  reserve  is  re- 
ported by  the  New  York  bank.  Boston  reports  a  gain  of  i .  o  million 
dollars,  and  smaller  gains  in  their  gold  holdings  are  shown  for  the  San 
Francisco  and  Kansas  City  banks.  The  combined  gain  reported  by 
these  banks  is,  however,  offset  to  a  large  extent  by  the  loss  of  4 . 2 
million  dollars  in  the  gold  reserve  reported  by  the  Chicago  bank. 

Loans  and  discounts  show  a  gain  of  i .  3  millions.  All  the  banks 
except  Philadelphia  and  Dallas  report  substantial  increases  over  the 
figures  of  the  preceding  week.  About  41  per  cent  of  all  the  paper  held 
matures  within  30  days,  and  almost  71  per  cent  wdthin  60  days.  Over 
3 . 8  million  dollars  of  agricultural  and  live-stock  paper,  maturing  after 
90  days,  is  reported  among  the  assets  of  the  banks.  The  holdings  of 
this  type  of  paper  constitute  now  10 . 7  per  cent  of  the  total  amount 
of  paper  in  the  hands  of  the  banks.  Of  the  total  of  24.9  millions  of 
discounts  proper,  the  three  Southern  banks  held  about  71  per  cent, 
San  Francisco  with  i .  8  million  dollars  of  rediscoimts  being  the  only 
other  bank  to  show  any  large  activity  in  the  discount  field.  Accept- 
ances totaled  II .  I  millions,  as  against  10. 2  milHons  at  the  end  of  the 
previous  week.  Boston  with  2 . 2  million  dollars.  New  York  with  4 . 7 
million  dollars  and  San  Francisco  with  i .  i  milUon  dollars  increased 
their  holdings  during  the  week.  Additional  purchases  of  $90,000  of 
United  States  bonds  by  the  Cleveland  bank  and  $75,000  by  the 
Chicago  bank  increase  the  total  of  United  States  bonds  held  by  all 
the  banks  to  about  7 . 2  miUions. 

Net  deposits  increased  about  11 .4  millions  during  th"e  week,  New 
York,  Chicago,  and  Boston  showing  the  largest  gains.  Federal 
Reserve  Agents  report  a  total  note  circulation  of  $74,595,500,  dis- 
tributed as  follows:  Boston,  $3,320,000;  New  York,  $35,100,000; 
Philadelphia,  $2,420,000;  Cleveland,  $3,300,000;  Richmond,  $7,500,- 
000;  Atlanta,  $4,950,000;  Chicago,  $4,380,000;  St.  Louis,  $625,500; 
Minneapolis,  $2,860,000;  Kansas  City,  $3,100,000;  Dallas,  $5,000,- 
000,  and  San  Francisco,  $2,040,000.  The  amount  of  gold  deposited 
with  the  agents  to  secure  circulation  is  given  as  $61,431,000. 

The  banks  report  $7,271,000  of  notes  on  hand  and  a  net  liability 
on  account  of  their  outstanding  circulation  of  $12,098,000. 

'  Adapted  from  the  Commercial  and  Financial  Chronicle,  C,  2067. 


CREDIT  AND  BANKING 


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MATERIALS  FOR  ELEMEhTTARY  ECONOMICS 


152.     STATEMENT  OF  CLEARING-HOUSE  BAKKS—C onlinued 

STATEMENTS  OF  RESERVE  POSITION 


Averages 

Cash 
Reserve 
in  Vault 

Reserve 
in  Deposi- 
taries 

Total 
Reserve 

♦Reserve 
Required 

Surplus 
Reserve 

Increase  or 
Decrease 
from  Pre- 
vious Week 

Members  federal  reserve 

$ 

311,921,000 
65,049,000 
68,806,000 

$ 

123,423,000 

7,422,000 

22,075,000 

$ 

435,344,000 
72,471,000 
90,881,000 

$ 

273,696,250 
50,806,800 
88,397.SSO 

$ 

i5i,t47.7SO 

21,664,200 

2,483,450 

$ 

—    307,170 

Slate  banks 

-3,895,880 
-t-1,364,700 

Total,  June  12 

445,776,000 

152,920,000 

598,696,000 

412,900,600 

185,759,400 

-2.838,350 

Actual  Figitres 

Cash 
Reserve 
in  Vault 

Reserve 
in  Deposi- 
taries 

Total 
Reserve 

t  Reserve 
Required 

Surplus 
Reserve 

Increase  or 
Decrease 
from  Pre- 
vious Week 

Members  feJeral  reserve 
bank. .        

$ 

317,232,000 
67,809,000 
65,922,000 

$ 

127,557,000 

7,551,000 

24,027,000 

$ 
444,809,000 
75,360,000 
89,949,000 

$ 

275,884,680 
50.916,420 
88,160,400 

$ 

168,924,320 

24,443,580 
1,788,600 

$ 

+6,028,600 

State    banks 

-f  2,747,200 

Trust  companies 

+    111,45a 

Total,  June  i  a 

450,963,000 

159.155,000 

6io,n8,ooo 

414,961,500 

195,156,500 

-1-8,887,250 

*  This  is  the  reserve  required  on  net  demand  deposits  in  the  case  of  state  banks  and  trust 
companies,  but  in  the  case  of  members  of  the  federal  reserve  banks  it  includes  also  the  amount  of 
reserve  required  on  net  time  deposits,  which  was  $806,350. 

t  This  is  the  reserve  required  on  net  demand  deposits  in  the  case  of  state  banks  and  trust 
companies,  but  in  the  case  of  members  of  the  federal  reserve  banks  it  includes  also  the  amount  of 
•^erve  required  on  net  time  deposits,  which  was  $808,500. 


153.    STATEMENTS  OF  TYPICAL  AMERICAN  BANKS 

New  York  Federal  Reserve  Bank 

statement  of  condition  at  the  close  of  business  july  30,  igi^" 

Resources 

Gold  coin  and  gold  certificates — 

Gold  settlement  fund $  13,733,000. oo 

Gold  in  vault 114,380,962.50 

Total  gold  reserve $128,113,962.  50 

Legal  tender  notes,  silver  certificates, 

and  subsidiary  coin 12,736,365.20 

Total  reserve $140,850,327 .  70 

Bills  discounted  and  bought — 

Commercial  paper $        587,398.43 

Bank  acceptances 5,536,766. 17 

Total 6,124,164.60 

'  Adapted  from  The  American  Banker.  LXXX.  2jjo. 


CREDIT  AND  BANKING  519 

Investments — 

Municipal  warrants $     5,688,422 .  74 

Federal  Reserve  notes  (net)    $    6,262,940.00 

All  other  resources 326,278.33 

Total 12,277,641.07 

Total  resources $159,252,133 -37 

Liabilities 

Capital $  10,823,800.00 

Reserve  deposits  (net) 142,411,385.08 

Due  to  other  Federal  Banks  (net) 4,489,967 .  49 

All  other  liabilities 1,526,980. 80 

Total  liabilities $159,252,133.37 

Federal  Reserve  notes  outstanding $  47,520,000. 00 

Against  which  there  is  deposited  with  Federal  Reserve 
Agent — ■ 

Commercial  paper $        200,000. 00 

Gold  and  lawful  money 47,320,000. 00 

Continental  and  Commercial  National  Bank  of  Chicago 

REPORT  OF  condition  AT  THE  CLOSE   OF  BUSINESS: 

Resources                                         June4iigi3'  May  1,1915" 

Loans  and  discounts $123,581,233.89  $137,202,412.85 

Overdrafts 3,689.58  6,067.80 

U.S.  bonds  to  secure  circulation 8,640,000.00  8,640,000.00 

U.S.  bonds  to  secure  deposits 250,000.00  280,000.00 

Other  stocks,  bonds,  and  mortgages .. .       15,719,128.41  7,421,590.47 

Real  estate,  furniture,  and  fixtures. . . .             13,847.00  13,847 .00 

Bank  promises  (equity) 6,000,000 .  00 

Premiums  paid 63,062 .  50  

Due  from  other  national  banks 18,138,682.35  34,607,496.98 

Due  from  state  banks  and  bankers. . . .        5,862,007 .47  9,208,867 .63 

Exchanges  for  clearing-house 5,709,024 . 08  10,983,056 .  19 

Bills  of  other  banks 450,560.00  1,845,995.00 

Cash  items,  nickels,  etc 140,970.87  346,202.10 

Specie 20,298,507.10  18,204,295.25 

Legal  tender  notes 15,357,940.00  6,260,950.00 

Redemption  fund 432,000 . 00  432,000 . 00 

Due  from  U.S.  treasurer 640,000.00  1,259,000.00 

Customers'  liabilities  on  letters  of  credit        i  ,005,91 1 .  01 

Balance  at  Federal  Reserve  Bank 10,542,260.49 

Total $215,300,653 .  25  $254,259,952 .  77 

'  From  the  Hand  Book  of  the  Banks  issued  by  the  Chicago  Evening  Post,  June, 
1913- 

» Ibid.,  May,  1915, 


520 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Liabilities 

Capital  stock  paid  in $  21,500,000.00    $  21,500,000.00 

Surplus  fund 8,500,000.00  8,500,000.00 

Undivided  profits 1,594,958.31  3,188,228.60 

National  bank  notes  outstanding 8,550,100.00  *8,639,997 .  50 

Individual  deposits  subject  to  check..  .  74,087,245.87  95,650,462.57 

Demand  certificates  of  deposit 1,165,603.22  1,343,511.47 

Time  certificates  of  deposit 325,384.90 

Certified  checks 783,010.48  1,780,319.08 

Cashier's  checks  outstanding 776,776.21  2,243,253.44 

Due  to  other  national  banks 60,259,316.25  68,390,835.34 

Due  to  state  banks  and  bankers 37,248,655.29  40,419,719.68 

Dividends  unpaid 1,134.00  6,024.00 

United  States  deposits 408,853 .  62  467,014 .  76 

Reserve  for  taxes 425,000.00  329,428.90 

Liability  on  letters  of  credit 1,028,130.00 

Foreign  bills  rediscounted 447,642 .  53 

Total $215,300,653 .  25    $254,259,952  77 

♦  [The  smallest  permissible  denomination  for  national  bank  notes  is  $s.  The  odd  amount  of  total 
notes  outstanding  results  from  the  redemption  of  half  of  a  torn  note. — Editors.) 

[Between  the  dates  of  these  two  statements  of  the  Bank  the  Federal  Reserve  Act  (see  selection 
159)  went  into  effect.  Some  of  the  changes  which  appear  in  the  statement  for  May  i,  1915,  reflect 
the  influence  of  this  new  legislation.  It  should  be  noticed,  however,  that  other  disturbing  in- 
fluences were  at  work,  including  the  European  war  and  industrial  depression  in  the  United  States. 
Also,  the  Bank  during  this  interval  moved  to  quarters  in  its  new  building. — Editors.) 

Old  Colony  Trust  Company,  Boston' 


STATEMENT   OF  CONDITION   OCTOBER    21,   1913 


BANKING 

A  ssets 

Other  stocks  and  bonds $11,776,057 

Loans  on  real  estate 302,611 

Demand  loans  with  collateral 13,014,548 

Other  demand  loans 3,891,848 

Time  loans  with  collateral 12,737,244 

Other  time  loans 23,340,508 

Overdrafts 2,780 

Syndicate  participations 630,251 

Banking  houses 2,200,000 

Safe  deposit  vaults 258,474 

Dile  from  reserve  banks 11,617,153 

Due  from  other  banks 3,226,066 

Cash — 

Currency  and  specie 8,139,323 

Other  cash  items 13.079 


$91,149,951 


DEP.^RTJfENT 

Liabilities 

Capital  stock 

Surplus  fund 

Undivided  earnings,  less  expenses, 

interest  and  taxes  paid 

Deposits — 

Demand — 

Subject  to  check 

For  payment  of  coupons,  etc 

Certificates  of  deposit 

Certified  checks 

Treasurer's  checks 

Time — 
Certificates  of  deposit  not  payable 

within  thirty  days 

Open  accounts  not  payable  within 

thirty  days 


Due  to  reserve  banks. 
Due  to  other  banks.  . 
Dividends  unpaid.  .  . . 
Reserved  for  taxes .  . . 
Reserved  for  interest . 


$  6,000,000 
8,000,000 

1,336,640 


63.785,238 

1,500,303 

1,316,824 

88,278 

90,742 


49».»79 
2,011,174 

33.S3I 

6,049,973 

40 

47,985 

396,594 


$91,149,951 
'  Report  0/ the  [Massachusetts]  Bank  Commissioner  for  1913,  Part  I,  pp.  475-76. 

[The  (tatemeat  of  the  Savings  Department  of  this  Company  is  here  omitted. — Editors.) 


CREDIT  AND  BANKING  521 


TRUST  DEPARTMENT 


Assets 

United  States  bonds 

State  bonds 

City,  county,  and  town  bonds. . . 

t         3,165.50 

38,981.94 

241.573  87 

1, 001,471 .87 

Street  railway  bonds    .  ....•■•■ 

327,838.75 

Miscellaneous  bonds 

Tiank  stocks             .  ......>.>•• 

614,123.73 
134,186  63 

3.746,646.43 

ManufacturincT  stocks.  ...>■•■. 

318,415.51 

^,6l7,O7^.30 

Loans  on  real  estate 

1,378,049.40 

Loans  with  collaterals  or  sureties 
Notes  of  individuals 

63,616.20 

6,616.09 

20,000.00 

Real  estate  owned   ........... 

570,848.87 

75,912.43 

Annuity  Dolicies             .....■■■• 

39,528.93 

Deposits  in  savings  banks 

Deposits  in  national  banks  or 

42,987.16 
349,838.06 

$11,370,774.63 

Liabilities 

On  trust  accounts $  9,077,703 .  79 

Income 75,i67.8» 

As  executors,  administrators,  etc.      2,055,259 .  02 
Income 63,643 .  08 


$11,370,774.63 


The  Dollar  Savings  Bank  of  Pittsburgh 
statement  of  condition  at  close  of  business 

NOVEMBER   6,    IQIl' 

Resources 
Reserve  fund: 

Cash,  specie,  and  notes $     150,152.90 

Due  from  approved  reserve  agents 1,853,134. 10 

Legal  securities  at  par 600,000. 00 

$  2,603,287.00 

Nickels  and  cents 26 .  69 

Checks  and  cash  items 1,212.17 

Loans  on  call  with  collateral 1,750,030. 00 

Loans  secured  by  bonds  and  mortgages 129,400. 00 

Bonds,  stocks,  etc 15.153)836. 25 

Mortgages  and  judgments  of  record 9,357)839- 61 

Office  building  and  lot 300,000. 00 

Other  real  estate 145,202 .  63 

Miscellaneous  assets 17,200. 00 


$29,458,034.35 

Liabiliiies 

Surplus  fund $  1,044,885.  57 

Undivided  profits,  less  expenses  and  taxes  paid 554,846. 20 

Individual  deposits,  time 27,858,243 .  18 

Miscellaneous  liabilities 59  •  40 

$29,458,034.35 
'  Report  of  the  [Pennsylvania]  Commissioner  of  Banking  for  19 11,  Part  1,  p.  270. 


522 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


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CREDIT  AND  BANKING 


523 


155.    STATEMENTS  OF  THE  BANK  OF  ENGLAND,  THE  BANK 
OF  FRANCE,  AND  THE  REICHSBANK 

Bank  of  England 

accounts  for  the  week  ended  july  2,  i913' 

Issue  Department 

Notes  issued £53,901,665    Government  debt £11,015,100 

Other  securities 7,434, 90& 

Gold  coin  and  bullion. . .     35,451,665 


£53,901,665 


£53,901,665 

Banking  Department 

Proprietors' capital. ...  £14,553,000  Government  securities.  £12,756,505 

Rest 3>345)46s  Other  securities 40,661,622 

Public  deposits* 14,737,272  Notes 24,271,745 

Other  deposits 46,633,003  Gold  and  silver  coin 1,595,921 

Seven-day    and    other 
bills 17,053 


£79,285,793  £79,285,793 

♦Including  Exchequer,  Savings  Bank,  Commissioners  of  National  Debt,  and  Dividend  Accounts. 


Bank  of  France 

RETURNS  for  JULY  3,    1913' 

Debtor 

Capital  of  the  bank 

Profits  in  addition  to  capital 

Reserve 

Reserve  of  landed  property 

Special  reserve 

Notes  in  circulation 

Interest  on  securities 

Bank  notes  to  order 

Treasury  account 

Current  accounts,  Paris 

"  "        branch  banks 

Dividends  payable 

Discounts  and  sundries 

Rediscounts 

Sundries 


•Figures  from  The  Econowtw/  (London),  July  5,  1913. 


Fr.     182,500,000.00 

8,006,145.84 

22,105,750.14 

4,000,000.00 

8,407,444.16 

5,663,027,165.00 

62,779,698.87 

4,330,652.80 

229,395,514-55 

591,285,833.77 

108,926,472.00 

12,994,551.11 

3,352,415-21 

5,532,896.00 

380,086,275.76 

Fr.  7,286,730,815.22 


524  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Creditor 

Cash  in  hand Fr.  3.945.569,423 •  82 

Commercial  bills  overdue 64,100.  23 

Discounts  in  Paris 614,944,245 .  05 

Foreign  bills 21,831,290.95 

Treasury  bills 134,579-  23 

Discounts  in  branches 1,220,876,898.00 

Advances  on  bullion  at  Paris 15,394,000. 00 

"       "       "  branch  banks 

Advances  on  Securities  at  Paris 209,851,250.61 

"         "          "          "  branch  banks 538,637,070.00 

Advance  to  the  State 200,000,000. 00 

Temporary  advances  (floods) 6,398,500. 00 

i)  Government  stock  (reserve  fund) 12,980,750. 14 

2)            "                "     (disposable  fund) 99,586,202 .25 

Rentes  immobilisees  (Government  stock) 100,000,000. 00 

Premises  and  furniture 42,101,019.22 

Expenses  of  management i  ,734,393  •  44 

Employ  special  reserve 8,304,499. 16 

Sundries 248,322,593.12 

Fr.  7,286,730,815.22 
The  Reichsbank 
balance  sheet  of  december  30,  1912' 
(All  items  are  stated  approximately  to  the  nearest  thousand  marks) 

Assets 

1.  Gold  in  bars  and  foreign  coin M.   337,334,ooo 

2.  Specie: 

Cash M.    699,701,000 

Notes  of  the  Imperial  Treasury. .  15,723,000 

Reichsbank  notes 3,313,649,000 

Notes  of  other  banks 12,767,000 


4,041,840,000 

Bills 2,036,916,000 

Loans 176,704,000 

Securities 108,310,000 

6.  Due  to  the  bank  on  current  account  with  its  corre- 

spondents   67,511,000 

7.  Amount  of  overdue  and  unpaid  bills 9,121,000 

8.  Value  of  real  property  belonging  to  the  bank 67,023,000 

9.  Sundry  Assets 37,924,000 

M.6,882,683,000 

•Adapted   from  The  Banker's  Magazine  (London),  XCVI,  242-43  (August, 
1913). 


CREDIT  AND  BANKING  525 

Liabilities 

1.  Capital M.    180,000,000 

2.  Reserve  fund 70,048,000 

3.  Reserve  fund  for  doubtful  debts 5,993,000 

4.  Total  amount  of  notes  created 5,833,147,000 

6.  Deposits  not  bearing  interest 393,000 

5.  Amount  due  on  clearing  and  current  accounts 746,464,000 

7.  Duty  on  note  issue  due  to  the  Imperial  Treasury 4,628,000 

8.  Sundry  liabilities 14,013,000 

9.  Net  profit  for  1912 M.37,407,000 

Less: 

a)  Preliminary  dividend 

to  shareholders.  M. 6,300,000 

b)  Paid  to  reserve  fund        3 , 1 1 1 ,000 


9,411,000 

27,996,000 
Unappropriated  profits  of  191 1 1,000 


27,997,000 


M. 6, 88  2, 683 ,000 


156.     THE  ELASTICITY  OF  CURRENCY' 

By  the  term  "elasticity"  as  applied  to  a  currency  is  meant  the 
capacity  to  expand  and  contract  with  an  increase  or  decrease  in  the 
demand  for  it — that  is  the  adaptation  of  currency  supply  to  currency 
need.  Indeed,  elasticity  consists  quite  as  much,  if  not  more,  in  the 
capacity  to  contract  as  to  expand. 

Entirely  apart  and  distinct  from  the  occasional  emergency 
demands  for  currency  growing  out  of  extraordinary  or  panic  condi- 
tions, which  it  is  not  intended  to  discuss  at  this  point,  there  are 
numerous  variations  in  the  demands  for  currency  at  different  times 
in  the  year,  arising  from  methods  of  doing  business,  and  especially 
from  the  ebb  and  flow  of  industrial  activity  at  different  seasons. 
Where  wages  are  paid  weekly,  for  example,  it  is  evident  that  there 
will  naturally  be  a  greater  demand  for  currency,  or  a  medium  of 
exchange,  on  Saturday  night  and  early  in  the  week,  than  there  would 
be  a  few  days  later  when  the  amounts  received  in  wages  at  the  close 
of  the  previous  week  had  been  largely  spent  and  returned  to  the  banks 
in  the  stream  of  deposits  from  local  tradesmen.     If  wages  were  paid 

"  Adapted  from  the  Report  of  the  Monetary  Commission  of  the  Indianapolis 
Convention  (1898),  pp.  309-31. 


526  MATERIALS  FOR  ELEMENTARY  ECONOMICS. 

only  at  monthly  intervals,  the  variations  on  this  account  would  be 
even  greater.  The  amounts  then  required  to  make  payments  on  the 
last  day  of  each  month,  or  the  amount  which  the  workmen  of  that 
community  might  hold  on  the  evening  of  that  day,  would  be  much 
more  than  the  amount  of  currency  which  would  be  in  the  hands  of 
these  same  workmen  four  weeks  later.  In  other  words,  there  would 
be  in  such  a  community  material  monthly  fluctuations  in  the  demand 
for  media  of  exchange,  due  to  the  methods  followed  in  making  pay- 
ments for  labor. 

Similarly,  the  practice  of  paying  rents,  settling  accounts,  etc., 
at  monthly  or  quarterly  intervals,  wherever  it  prevails,  leads  to  a 
considerable  increase  in  the  demand  for  media  of  exchange  at  certain 
periods,  and  a  falling  off  at  other  periods;  while  the  practice  of  pay- 
ing dividends  on  stocks,  and  interest  on  bonds  or  on  mortgages  at 
definite  quarterly,  or  semi-annual,  or  annual  intervals,  which  has 
become  so  marked  in  the  development  of  these  forms  of  investment, 
greatly  intensifies  the  increased  demand  for  some  means  of  payment 
at  such  dates. 

But,  perhaps  the  most  marked  instance  of  this  periodically  in- 
creased demand  grows  out  of  the  marketing  of  the  crops.  Manu- 
factured goods  are,  in  general,  capable  of  being  marketed  continuously 
throughout  the  year,  and  it  is  the  aim  of  manufacturers  so  to  adjust 
their  production  that  this  end  will  be  secured.  In  the  case  of  agri- 
cultural products,  however,  the  circumstances  are  otherwise.  The 
greater  part  of  our  immense  agricultural  crops  is  marketed  within  a 
period  of  three  or  four  months.  From  the  necessity  of  placing  such 
large  amounts  of  these  products  on  the  market  at  fixed  recurring 
periods,  arises  one  of  the  most  marked  seasonal  demands  for  an 
increased  medium  of  exchange. 

Some  of  our  ordinary  media  of  exchange  possess  the  character- 
istic of  elasticity — the  capacity  of  expanding  and  contracting  with 
these  varying  needs  of  business — to  a  much  greater  degree  than  others. 
The  deposit-currency  by  means  of  which  the  largest  part  of  our  com- 
mercial transactions  is  effected  is  particularly  elastic.  It  expands  and 
contracts  automatically  with  every  change  in  demand.  If  additional 
currency  is  wanted  in  a  strictly  commercial  community  for  any  of 
these  extraordinary  demands — by  a  railroad,  for  example,  to  provide 
for  the  payment  of  interest  on  its  bonds — it  is  secured  from  an  exist- 
ing deposit,  or  by  means  of  a  loan  granted  in  the  form  of  deposit- 
currency  against  which  checks  for  the  interest  are  drawn;  and  to  the 


CREDIT  AND  BANKING  527 

extent  which  those  to  whom  the  interest  is  paid  likewise  make  use 
of  the  check  and  deposit  system,  the  whole  transaction  is  carried 
through  without  the  least  trouble  or  friction.  This  currency  expands 
freely  and  automatically  to  meet  any  real  need,  and  contracts  as 
easily  as  it  expanded  when  it  is  no  longer  desired. 

But  manifestly  not  all  these  needs  which  have  been  suggested  for 
increased  supplies  of  a  medium  of  exchange  can  be  met  by  an  expan- 
sion of  the  deposit-currency.  Whether  or  not  any  particular  demand 
can  be  so  met,  will  depend  largely  upon  the  business  habits  of  the 
community  and  the  commercial  development  of  the  individuals  or 
the  character  of  the  transactions. 

In  the  payment  of  weekly  wages,  for  example,  the  deposit-currency 
is  very  rarely  used,  even  in  the  more  highly  developed  commercial 
centers;  either  coin  or  some  form  of  note-currency  is  required.  But 
in  this  case  the  periods  are  so  frequent  that  the  demand  may  be  said 
to  be  practically  constant,  as  the  necessity  of  providing  for  it  is  always 
present,  and  there  is  little  opportunity  for  making  any  other  use  of  the 
funds  required  for  this  purpose  in  the  brief  intervals  when  they  are  not 
actually  in  use. 

The  parties  to  monthly  payments  on  account  of  wages,  rents,  and 
accounts,  though  still  requiring  a  large  use  of  the  note-currency,  do 
make  a  larger  use  of  the  deposit-currency  than  the  classes  just  referred 
to.  And  when  the  quarterly  and  half-yearly  settlements  of  accounts, 
rents,  dividends,  and  interest  are  considered  it  is  found  that  in  all 
communities  of  high  commercial  development  the  deposit-currency 
is  the  form  most  used.  And,  as  already  suggested,  so  far  as  this 
particular  medium  of  exchange  is  used,  there  is  no  ground  for  com- 
plaint on  the  score  of  inelasticity.  The  increased  demands  for 
currency  arising  from  these  transactions  are  in  fact  met  by  so  auto- 
matic an  adjustment  of  the  supply  that  little  visible  evidence  is  left 
that  there  has  been  any  fluctuation  in  the  demand. 

The  most  marked  variations  in  demand  for  currency  in  this 
country  occur  in  connection  with  the  annual  marketing  of  the  crops. 
Owing  to  the  fact  that  the  agricultural  classes  involved  in  these 
transactions  do  not  use  the  check  and  deposit  system  to  any  great 
extent,  this  demand  is  largely  for  a  note-currency.  The  farmer  on 
selling  his  crops  may  indeed  receive  a  check  in  payment;  but  as  he 
and  a  large  part  of  the  community  with  which  he  deals  do  not  find 
the  check  and  deposit  system  convenient,  he  is  not  satisfied  with 
that  sort  of  payment.    He  cashes  the  check  at  the  bank,  or  through 


528 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


some  merchant,  and  thus  secures  the  form  of  currency  which  he 
requires.  If  he  cashes  it  with  a  merchant,  a  portion  may  be  merely 
offset  against  his  account  at  the  "store"  where  he  deals,  and  to  that 
extent  the  demand  may  be  satisfied  without  resort  to  note-currency. 
But  not  so  with  the  balance;   for  that  he  must  have  coin  or  notes. 

Note  Issues  of  the  Imi'erial  Bank  of  Germany' 


» Figures  are  percentages  of  the  lowest  circulation  during  18Q4-95. 

Some  of  this  currency  is  used  at  once  in  settling  outstanding  accounts, 
and  thus  gets  back  to  the  bank  almost  immediately  through  the  de- 
posits of  the  tradesmen.  To  this  extent  the  demand  is  of  short  dura- 
tion. The  rest  of  the  currency  is  paid  out  from  time  to  time  during 
the  fall  and  winter  for  "help,"  and  in  the  purchase  of  the  winter's 
supplies,  or  is  held  in  cash  in  many  cases  to  meet  spring  payments  on 
a  mortgage.    The  net  result  is  that  the  average  farmer  has  in  his 


CREDIT  AND  BANKING 


529 


possession  for  the  three  or  four  months  after  he  has  sold  his  crop,  a 
much  larger  sum  of  money  or  notes  than  during  the  three  or  four 
months  immediately  preceding.  Taken  in  the  aggregate,  this  makes 
a  largely  increased  demand  for  currency  in  the  form  of  notes  in  the 
fall  season  of  the  year. 

In  Germany,  the  absence  of  the  development  of  the  check  and 
deposit  system  has  left  the  burden  of  increased  demand  to  fall  almost 
exclusively  on  the  note-currency.  The  result  is  a  much  more  marked 
fluctuation  in  the  supply  of  that  particular  medium  of  exchange  than 
was  exhibited  in  England,  Ireland,  or  Scotland,  where  the  extreme 
elasticity  of  the  deposit-currency  permitted  the  heaviest  demands 

Note  Issues  of  the  National  Banks  of  the  United  States 


CENT 

105 
J  00 

1894 

189S 

PER 
CMT 

105 
100 

JAN.  FEB.  MAR. 

APR.  MAY  JUNE 

lULY  AUG.  SEP. 

OCT.  NOV.  DEC. 

^AN.  FEB.  MAR. 

APR.  HAY  JUNE 

lUlY  AUG.  SEP. 

OCT   NOV.  OEt 

•-.... 

-^.             y^ 

,.^^:j.:: 

" 

^ ^ 

The  data  given  in  the  heavy  line  are  the  statements  of  outstanding  circulation 
ordinarily  quoted.  They  include,  however,  notes  still  held  in  the  vaults  and  tills 
of  the  issuing  bank;  and,  to  the  extent  that  this  amount  varies  at  different  seasons 
of  the  year,  this  puts  the  circulation  on  a  different  basis  from  the  others  described 
and  thus  vitiates  comparison.  Fortunately  we  have  the  required  data  given  on 
the  same  basis  as  in  the  other  systems  for  the  five  dates  in  each  year  for  which 
reports  are  made  by  the  Comptroller  of  the  Currency.  This  information  is  platted 
on  the  diagram  in  the  broken  line,  and  is  such  as  to  indicate  that  even  if  we  had 
similar  figures  for  weekly  or  monthly  periods  the  elasticity  shown  would  not  be 
materially  greater. 

to  be  met  without  the  use  of  notes.  It  will  be  noticed  that  in  addition 
to  the  movements  in  January,  April,  July,  and  October,  resulting 
from  the  settlement  of  dividends,  interest  and  other  quarterly  pay- 
ments, there  are  well  defined  monthly  movements  arising  from  the 
requirement  of  more  currency  in  the  settlement  of  accounts,  rents, 
salaries,  etc.,  at  the  end  of  each  month. 

The  currency  problem  in  the  United  States  is  mainly  an  agricul- 
tural one,  for  the  reason  that  the  commercial  centers  are  already 
supplied  with  a  currency  of  the  maximum  elasticity — namely,  deposits. 
In  the  distinctly  agricultural  sections,  however,  practically  the  same 


530  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

demands  for  currency  exist  as  in  Canada — the  chief  characteristic 
of  which  is  an  urgent  need  in  the  autumn,  at  the  time  the  crops 
are  being  marketed.  Owing,  however,  to  the  inelasticity  of  our 
bank-note  currency,  the  demand  does  not  find  an  automatic  response 
in  our  circulation.  That  the  demand  exists,  however,  is  evidenced 
in  several  ways— partly  through  its  effects,  and  partly  through  the 
means  which  are  taken  to  satisfy  it. 

There  is,  for  instance,  a  well-defined  annual  movement  of  cur- 
rency out  of  New  York  and  the  financial  centers.  This  takes  place 
regularly  every  year,  commencing  usually  in  July  and  August  and 
continuing  until  well  into  December.  The  net  movements  of  money 
between  New  York  and  the  interior  are  reported  each  week  in  the 
financial  journals.  From  these  it  appears  that  during  January  and 
February  the  country  is  usually  emptying  its  idle  money  into  New 
York;  in  March  there  is  a  slight  reaction,  lasting  only  a  few  weeks, 
and  from  May  until  August,  the  tide  again  flows  strongly  toward  New 
York.  With  August  the  turn  comes,  and  the  movement  to  the  interior 
is  again  strong  and  continuous  until  December. 

This  method  o^  meeting  an  increased  demand  for  currency  in 
certain  sections,  mainly  by  withdrawing  supplies  from  other  districts, 
has  its  effects  on  the  currency  conditions  of  the  places  which  are  called 
upon  to  furnish  the  supplies  of  currency.  It  is  so  in  the  case  of  New 
York.  With  the  commencement  of  the  outward  currency  movement 
the  surplus  reserves  of  the  New  York  City  banks  begin  to  decline. 
The  usual  period  of  currency  shipments  West  and  South  is  the  period 
of  diminishing  reserves,  and  in  December,  as  the  current  turns,  the 
reserves  again  fill  up.  The  rates  of  interest  on  call  loans,  it  is  well 
understood,  vary  inversely  with  the  surplus  bank  reserves.  When 
reserves  are  low  the' rate  of  interest  is  sure  to  be  high,  and  when 
reserves  are  above  normal,  the  call  loans  are  again  made  at  low  rates 
of  interest. 

There  is  another  way  in  which  the  efforts  of  the  banks  of  this 
country  to  meet  the  enlarged  autumnal  demand  in  rural  communities 
is  manifested.  This  is  through  the  operations  of  the  banks  in  those 
sections.  That  the  demand  is  for  note-currency,  is  a  fact  well  known 
to  the  bankers.  In  consequence,  the  affairs  of  each  bank  are  as  far 
as  possible  so  shaped  as  to  enable  it  to  respond. 


CREDIT  AND  BANKING  531 

157.    A  SUMMARY  VIEW  OF  THE  WORK  OF  THE 
INDEPENDENT  TREASURY' 

I.      HISTORICAL   SUMMARY 

1.  The  policy  of  the  government  has  been  changeable.  In  the 
first  few  years  after  the  adoption  of  the  Constitution,  before  the 
subject  attracted  serious  public  attention,  there  were  no  specific 
places  for  the  custody  of  the  public  money,  and  it  was  left  largely 
in  the  hands  of  collecting  and  disbursing  officers. 

2.  During  the  existence  of  the  first  and  second  United  States 
Banks,  that  is,  from  1796  to  1811,  and  from  1816  to  1833,  the  date  of 
the  "removal  of  the  deposits,"  the  public  money  was  kept  mainly 
in  these  institutions  and  their  branches.  Nevertheless,  even  during 
these  periods  some  state  banks  were  employed. 

3.  In  the  interim  between  the  closing  of  the  first  United  States 
Bank  and  the  opening  of  the  second,  the  public  money  was  kept  mainly 
in  the  state-chartered  banks.  These  banks  were  also  used  after  the 
government  ceased  to  employ  the  second  United  States  Bank  in 
1833,  and  also  after  the  expiration  of  the  charter  of  that  bank  until 
the  establishment  of  the  independent  treasury  in  1846. 

4.  Beginning  with  1847,  immediately  after  the  establishment  of 
the  independent  treasury,  the  public  money  was  kept  in  the  Treasury 
and  subtreasuries,  and  no  banks  were  used  until  after  the  establish- 
ment of  the  present  national  banking  system,  in  1863.  Since  that 
time  the  depositary  banks  have  supplemented  the  use  of  the  sub- 
treasuries  as  places  for  the  keeping  of  the  pubKc  money. 

5.  In  the  past  one  hundred  and  twenty  years,  therefore,  there 
are  only  seventeen,  1 847-1 864,  in  which  the  government  did  not 
use  depositary  banks  for  keeping  the  pubUc  money. 

6.  The  evidence  therefore  shows  that  there  has  been,  uniformly, 
a  strong  tendency  for  the  government,  throughout  its  history,  to  use 
banks. 

7.  The  causes  of  this  tendency  are  shown  to  have  been  the  greater 
convenience  in  the  management  of  the  public  money,  the  desire  of 
the  Secretary  and  the  pubHc  that  government  fiscal  operations  should 
interfere  as  little  as  possible  with  the  monetary  circulation  and  with 
business  conditions,  the  necessities  of  the  government,  and  pressure 
from  banking  and  other  interests. 

'  Adapted  from  David  Kinley,  The  Independent  Treasury  of  the  United  States 
and  Its  Relations  to  the  Banks  of  the  Country,  pp.  323-30.  National  Monetary 
Commission,  1910. 


532  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

8.  Under  the  influence  and  pressure  described,  first  the  Secretary 
of  the  Treasury,  and  later  Congress,  have  given  way,  and  virtually 
abandoned  the  policy  of  independence  in  the  keeping  and  manage- 
ment of  public  money  which  was  established  by  the  act  of  August, 
1S46.  Congress  authorized  the  use  of  national  banks  in  which  to 
deposit  receipts  from  internal  revenue.  With  some  vacillations, 
the  extent  of  the  use  of  the  banks  as  depositaries  for  these  receipts 
has  steadily  increased.  By  recent  legislation  receipts  from  customs 
may  also  be  deposited  in  the  banks.  Under  the  first  interpretation 
of  the  law  permitting  these  deposits,  they  could  accrue  only  as  the 
collecting  officers  placed  the  money  received  by  them  in  the  banks  and 
not  from  the  transfer  of  government  receipts  once  deposited  in  the 
treasuries.  By  later  practice  the  latter  method  of  deposit  has  also 
been  adopted  and  is  claimed  by  some  to  be  legal.  Under  present 
practice  and  legislation,  therefore,  the  Secretary  of  the  Treasury  has 
a  free  hand  to  put  any  and  all  receipts  of  public  money  in  the  de- 
positary banks.  The  independence  of  the  Treasury  depends  entirely 
upon  the  will  of  the  Secretary. 

9.  A  further  departure  from  the  policy  of  independence  is  shown 
by  the  course  of  opinion  and  legislation  concerning  security  for  deposits. 
Under  the  law  as  passed,  public  deposits  were  to  be  secured  by  United 
States  bonds  and  otherwise.  This  was  understood  to  mean  United 
States  bonds  in  addition  to  a  personal  bond.  Eight  years  ago  the 
phrase  was  differently  interpreted,  and  banks  were  permitted  to 
secure  deposits  on  the  basis  of  other  than  United  States  bonds  as  se- 
curity. The  practice  thus  established  was  legalized  between  two  and 
three  years  ago. 

10.  At  first  the  banks  which  obtained  public  money  on  deposit 
were  expected  to  keep  a  reserve  against  it,  as  provided  by  the  law  of 
their  being.  Some  seven  or  eight  years  ago  this  practice  was  broken 
and  the  banks  allowed  to  hold  public  deposits  without  protecting  them 
by  a  reserve.    The  practice  thus  initiated  was  also  later  made  legal. 

11.  Finally,  with  all  these  changes,  the  amount  of  public  money 
deposited  with  the  banks  has  steadily  increased,  until  at  one  time  in 
recent  years,  only  a  comparatively  small  working  balance  was  kept 
in  hand  by  the  Treasury  itself. 

II.      OPERATION   AND   INFLUENCE 

X.  The  independent  treasury  system  disturbs  the  money  market 
in  ordinary  times  by  its  irregular  intake  and  output  of  money.     If 


CREDIT  AND  BANKING  ^  533 

the  intake  happens  to  occur  on  a  rising  speculative  market  it  may  do 
some  good  by  restricting  speculation.  It  if  happens  to  occur  when 
business  operations  call  for  an  easier  market,  the  influence  is  likely 
to  be  harmful.  Corresponding  results  flow  from  the  relative  times 
of  the  occurrence  of  the  output.  These  influences  are  intensified 
when  government  receipts  exceed  expenditures  for  considerable 
periods. 

2.  In  times  of  crises,  or  panic,  the  independent  treasury  may  aid 
the  money  market  (a)  by  depositing  a  surplus  revenue  in  the  banks 
and  thus  restoring  the  money  to  circulation;  (b)  by  prepaying  interest 
on  the  public  debt,  by  "timing"  interest,  pension,  and  other  pay- 
ments; and  (c)  by  buying  bonds. 

The  first  method  is  open  to  the  objection  that  pressure  from  the 
banks  for  a  general  distribution  may  prevent  the  deposits  from  being 
made  in  suflicient  measure  where  they  are  most  needed.  Then, 
too,  the  charge  of  favoritism  in  the  selection  of  banks  has  been  made. 
Further,  if  such  deposits  are  to  be  made  there  is  no  good  reason  for 
requiring  security,  or  for  excusing  the  banks  from  maintaining  a 
reserve  against  such  deposits.  Moreover,  the  Secretary  of  the 
Treasury  should  be  allowed  to  check  against  these  deposits  instead  of 
being  compelled  to  use  the  present  compressed  method  of  withdrawal. 

The  prepayment  of  interest  and  the  "timing"  of  other  payments 
are  too  trivial  to  be  worthy  of  a  great  government. 

Attempts  made  to  relieve  the  money  market  by  buying  bonds 
are  open  to  the  objection  that  there  is  a  loss  involved  in  prepaying 
the  debt. 

All  the  modes  of  relieving  the  money  market  are  open  to  the  three 
general  objections  that  the  process  puts  too  great  power  in  the  hands 
of  the  Secretary;  that,  however  well  he  discharges  his  responsibility, 
he  is  likely  to  make  mistakes  which  will  make  the  situation  worse; 
and  that  any  such  interference  must  be,  from  its  nature,  arbitrary. 

3.  Objections  may  be  made  against  the  independent  treasury  in 
the  fiscal  operations  of  the  government  in  time  of  war.  Although 
by  means  of  the  system  the  Treasury  succeeded  in  placing  its  loans 
during  the  Mexican  War,  it  failed  to  do  so  in  the  Civil  War.  It  also 
failed  during  the  time  following  1890,  although  this  was  not  a  period 
of  war.  It  succeeded,  in  a  way,  in  placing  the  Spanish  War  loan 
directly,  but  ventured  to  make  the  experiment  only  after  securing 
the  assurance  of  the  banks  that  they  would  sustain  it.  In  all  impor- 
tant loan  negotiations  in  the  past  fifty  years  the  Treasury  has  been 
obliged,  in  one  way  or  another,  to  rely  upon  the  banks  for  aid. 


534  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

4.  The  main  advantage  claimed  for  the  direct  placing  of  loans 
by  the  independent  treasury  is  that  the  loans  are  more  widely  dis- 
tributed or  more  popular.  Experience  shows  that  this  is  not  the 
case.  Even  though  the  loan  be  widely  distributed  at  first,  the  securi- 
ties soon  become  concentrated  in  the  hands  of  a  few  holders,  princi- 
pally the  banks.  There  is  reason  to  think,  too,  that  in  time  of  war 
a  loan  can  be  placed  at  less  expense  through  banks  and  banking 
syndicates. 

5.  The  money  may  be  regarded  as  safe.  Experience  shows, 
however,  that  defalcations  and  thefts  may  occur  under  the  system. 

6.  The  system  has  had  the  support  of  popular  opinion.  This 
support  arises  from  the  fact  that  the  system  worked  well  for  some  time 
after  it  was  established,  thus  forming  a  striking  contrast  with  the 
evil  operation  of  the  state  bank  depositaries.  Moreover,  there  is  a 
popular  distrust  of  banks,  especially  large  ones. 

m.      PROPOSALS  FOR  THE  REPLACEMENT  OF  THE  SYSTEM 

1.  Enlarge  the  present  national  bank  depositary  system  by 
putting  the  receipts  of  the  government  immediately  into  the  banks 
when  collected,  without  a  deposit  of  bonds  as  security,  the  banks  to 
pay  a  reasonable  rate  of  interest  to  the  government  on  its  balances, 
and  the  government  officers  to  check  against  deposit  accounts. 

2.  Modify  the  first  proposal  by  dividing  the  coimtry  into  clearing- 
house or  bank  depositary  districts.  Establish  a  clearing-house  for 
each  district,  and  enlarge  the  functions  of  the  clearing-house  so  as 
to  make  it  the  agent  for  all  the  banks  of  the  district,  with  which  the 
government  officers  may  deal  directly.  Under  this  system  all  govern- 
ment moneys  will  be  deposited  with  the  clearing-house  or  district 
bank,  which  will  be  responsible  to  the  government,  and  it  may  rede- 
posit  with  the  banks  of  its  district  under  arrangements  to  be  provided. 

3.  Establish  a  central  bank  independent  of  the  government  and 
of  existing  banks,  which  shall  be  the  depositary  and  fiscal  agent  of 
the  government. 

4.  Establish  a  federated  bank  to  include  all  national  banks. 
This,  of  course,  is  a  form  of  central  bank.  Instead  of  being  inde- 
pendent of  the  existing  banks,  it  would  be  a  federation  of  them. 

5.  Make  the  Treasury  itself  a  government  bank  by  enlarging  its 
present  banking  functions  and  giving  the  Secretary  a  stafif  of  expert 
business  and  banking  advisers. 

[Note. — See  Selection  159  for  the  modifications  actually  made  by  the  act  of 
December  23,  1913. — Editors.] 


CREDIT  AND  BANKING  535 

158.    BANKERS'  VIEWS  OF  OUR  BANKING  AND  CURRENCY 

NEEDS' 

The  following  are  some  of  the  answers  prepared  by  the  Currency 
Commission  of  the  American  Bankers'  Association  to  questions  formu- 
lated by  a  subcommittee  of  the  Banking  and  Currency  Committee  of 
the  United  States  Senate. 

I.  What  are  the  essential  defects  of  our  banking  and  currency 
system  ? 

Answer,  a)  A  principal  defect  of  our  system  is  the  absolute 
rigidity  of  our  currency.  A  bank  in  order  to  take  out  circulation  must 
invest  more  money  in  government  bonds  than  it  is  permitted  to  issue 
in  currency,  thereby  impairing,  rather  than  increasing,  its  power  to 
aid  commerce  and  trade. 

Outside  of  the  three  central  reserve  cities  there  is  no  redemption 
of  national  bank  notes,  except  when  and  as  they  wear  out  and  become 
unfit  to  circulate.  This  condition  is  inherent  in  the  system  and  is 
certainly  unsound. 

b)  The  system  lacks  cohesiveness,  there  being  no  provision  for 
co-operation  among  the  banks  in  it.  Under  ordinary  conditions  this 
is  not  so  much  felt  by  the  banks  individually,  but  under  strained 
financial  conditions,  when  each  bank  is  thrown  on  its  own  resoiu-ces 
and  must  in  self-protection  act  independently  of  all  the  rest,  the  lack 
of  a  system  under  which  all  could  co-operate  through  a  common 
policy  of  action  becomes  keenly  felt  and  it  becomes  evident  that  what 
is  really  lacking  is  a  system. 

c)  The  requirement  that  the  banks  must  individually  control  their 
own  portion  of  the  legal  reserve  money  of  the  country,  without  being 
provided  with  proper  means  for  the  protection  or  replenishment  of 
their  legal  reserves,  is  unscientific  and  economically  wasteful. 

d)  An  unsound  system  of  reserves  under  which  in  periods  of 
anxiety  it  becomes  necessary  in  the  protection  and  maintenance  of 
individual  reserves  for  each  bank  in  the  national  system  to  contend 
against  every  other  bank;  the  dissipation  and  scattering  of  the  great 
bulk  of  the  reserve  money  of  the  country  into  a  large  number  of  small 
hoardings,  completely  destroying  in  times  of  stringency  the  strength 
and  power  which  might  be  gained  by  unification  and  massing  of 
reserves  for  the  mutual  support  of  the  banks  and  the  common  good 
of  the  public. 

'  Adapted  from  a  pamphlet  issued  by  the  Currency  Commission  of  the  Ameri- 
can Bankers'  Association,  1913.  The  numbering  of  the  questions  has  here  been 
changed. 


536  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

e)  The  use  of  so  much  of  the  legal  reserve  money  of  the  country 
in  actual  circulation  for  ordinary  business  puqjoses  is  another  economi- 
cal waste.  No  provision  is  made  for  the  use  of  any  substitute  for 
legal  reserve  money  as  a  circulating  medium  other  than  the  national 
bank  notes  secured  by  government  bonds,  which  are  as  inflexible  in 
their  volume  and  therefore  as  irresponsive  to  the  fluctuating  com- 
mercial needs  for  them  as  the  legal  reserve  money  itself.  The  gold 
certificates  now  in  circulation,  amounting  to  $1,085,489,000,  being 
merely  warehouse  receipts  for  an  equal  amount  of  gold  in  the  govern- 
ment treasury,  form  the  most  conspicuous  example  of  this  economic 
waste. 

f)  The  lack  of  elasticity  in  the  circulation,  all  forms  of  our  present 
circulating  medium  being  rigidly  fixed  in  amount.  The  necessities  of 
commerce  for  a  circulating  medium  are  arbitrarily  met  with  a  fixed 
amount  of  it,  which  does  not  respond  in  its  volume  to  the  fluctuating 
demands.  Assuming  that  the  aggregate  amount  may  be  just  sufl5- 
cient  for  an  average  volume  of  general  business,  then  there  must  be 
a  surplus  when  the  volume  of  business  falls  below  the  average  and  a 
deficiency  when  the  volume  of  business  rises  above  the  average.  The 
actual  condition,  however,  is  that  in  each  year  there  are  seasons  in 
which  the  needs  for  circulation  are  much  heavier  than  they  are  in 
other  seasons,  so  that  its  inadaptability  in  volume  to  the  legitimate 
existing  demand  is  constantly  felt.  We  have  as  a  rule  either  a  surplus 
or  a  deficiency. 

g)  The  restriction  of  the  use  by  the  banks  of  their  legal  reserves 
and  the  prohibition  of  their  lending  power  in  the  presence  of  unusual 
demands  upon  them,  without  means  of  protecting  their  reserves  by 
the  use  of  any  satisfactory  substitute  therefor,  or  of  replenishing  them 
through  adequate  rediscounting  facilities,  which  would  enable  them 
to  convert  their  available  assets  into  cash  or  legal  reserve. 

h)  The.lack  of  provision  for  the  organization  of  American  banking 
institutions  in  foreign  countries,  which  are  necessary  for  the  develop- 
ment of  our  foreign  trade. 

i)  The  independent  treasury  system,  under  which  the  government 
acts  as  partial  custodian  of  its  own  funds,  resulting  in  irregular  with- 
drawals of  money  from  the  bank  reserves  and  from  circulation  and 
materially  interfering  with  the  even  tenor  of  general  business. 

j)  No  open  market  for  commercial  paper;  banks  of  sufficient 
capital  should  be  allowed  to  accept  drafts,  for  a  commission,  with  a 
view  to  the  sale  of  the  acceptances  in  the  open  market,  thereby  estab- 


CREDIT  AND  BANKING  537 

lishing  a  current  market  for  commercial  paper  and  thus  enabling 
banks  to  buy,  whenever  they  have  an  overplus  of  funds,  or  sell  in  this 
market,  whenever  they  wish  to  strengthen  their  position  or  meet 
demands  against  them,  or  accumulate  funds  for  the  use  of  their 
regular  clientele. 

2.  Enumerate  concisely  its  advantages  and  disadvantages. 
Answer:    a)  One  advantage  of  our  banking  system  is  that  it 

enables  each  community  to  organize  and  control  its  own  banking 
facilities. 

b)  It  has  for  half  a  century  provided  the  govern/nent  with  a 
market  for  its  bonds.  This  was  a  great  advantage  to  the  government 
at  the  time  the  banking  system  was  inaugurated  and  it  has  since  been 
taken  advantage  of  by  the  government  to  reduce  by  two-thirds  the 
rate  of  interest  on  its  bonds.  On  some  issues  of  its  2  per  cent  bonds 
it  has  obtained  a  premium,  notwithstanding  the  fact  that  without 
this  artificial  market  their  investment  value  would  be  about  30  per 
cent  below  par. 

c)  Another  advantage  of  no  small  importance  in  view  of  the  con- 
ditions of  the  bank  note  circulation  of  the  state  banks  at  the  time  the 
bank  act  was  enacted  is  that  it  has  provided  a  bank  note  circulation 
of  uniform  value,  which  in  spite  of  its  defects  is  of  undoubted  strength 
and  stability. 

Its  disadvantages  are  covered  in  the  list  of  its  defects.  It  might, 
however,  be  stated  as  an  offset  to  the  advantages  referred  to,  (b)  and 
(c),  that  the  artificial  market  maintained  for  government  bonds  has 
been  so  maintained  at  the  expense  of  the  banking  development  and 
commercial  growth  of  the  country,  both  of  which  have  been  seriously 
retarded  by  the  costly  periodical  panics  for  which  the  defects  of  the 
banking  and  currency  system  are  principally  responsible. 

3.  Should  national  banks  continue  to  have  a  bond-secured  cur- 
rency ? 

Answer:  No.  In  the  use  of  government  bonds  as  security  for 
circulation,  the  volume  of  currency,  instead  of  fluctuating  with  the 
varying  requirements  of  trade,  is  limited  by  the  volume  of  bonds  and 
fluctuates  according  to  their  market  prices.  These  prices  are  deter- 
mined, not  by  the  general  investment  value  of  the  bonds,  but  by  the 
profit  possible  to  banks  in  using  them  as  security  for  circulating  notes, 
resulting  in  artificial  stimulation  of  government  bond  prices.  One 
unfortunate  consequence  of  this  artificial  condition  is  that  the  nation's 
bonds,  which  should  be  widely  held  by  its  citizens  as  their  choicest 


538  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

investment,  are  held  almost  exclusively  by  banks  to  secure  circulation 
or  government  deposits. 

4.  Should  an  elastic  currency  be  authorized  by  law  ?  If  so, 
should  it  be  limited,  and  to  what  amount  ? 

Answer:  Regarding  an  elastic  currency  as  a  vital  necessity  in 
connection  with  the  banking  and  currency  system  of  this  country, 
we  believe  that  such  a  currency  should  be  authorized  by  law.  The 
amount  of  it  should  be  controlled  by  the  gold  reserve  requirements 
against  it.  Such  gold  reserve  should  be  ample,  not  less  than  50  per 
cent  as  a  recognized  minimum.  A  special  tax  might  be  levied  upon 
any  deficiency  of  the  reserve  below  the  stipulated  amount  of  it,  this 
tax  to  be  increased  as  the  deficiency  increases.  Such  provision  would 
in  our  opinion  prevent  over  expansion  of  the  currency. 

5.  Should  such  currency  be  the  notes  of  the  individual  banks,  or 
of  a  central  reserve  association,  or  of  a  number  of  regional  reserve 
associations,  or  of  the  United  States  Treasury  ? 

Answer:  Preferably  by  a  central  reserve  association.  Good 
results  may  be  accomplished  by  a  number  of  regional  reserve  asso- 
ciations, if  the  control  of  their  resources  were  properly  placed  under 
central  joint  control  of  the  government  and  the  banks.  Doubtless  a 
safe  currency  could  be  issued  by  the  United  States  Treasury,  if  the 
law  providing  the  same  were  properly  drawn,  but  it  would  seem  diffi- 
cult if  not  impossible  to  provide  for  its  proper  expansion  and  con- 
traction in  accordance  with  the  demands  of  trade.  The  experience  of 
the  world  is  that  it  is  better  for  a  government  to  provide  for  such 
currency  indirectly,  through  some  privately  owned  corporation  under 
strict  governmental  supervision,  rather  than  put  the  credit  of  the 
government  at  issue  with  every  note  placed  in  circulation.  Trouble- 
some times  come  to  every  community  and  every  nation,  and  it  is 
better  then  to  have  the  credit  of  the  bank  called  in  question,  than  the 
credit  of  the  government  itself. 

6.  If  a  tax  on  this  currency  payable  to  the  government  is  pro- 
vided, should  it  be  graduated  so  as  to  increase  with  the  volume  of 
currency  issued  by  the  reserve  association,  or  graduated  so  as  to 
increase  with'  the  length  of  time  it  is  outstanding  ? 

Answer:  A  tax  upon  the  deficiency  in  reserve  graduated  on  a 
scale  increasing  as  the  deficiency  increases  removes  all  necessity  or 
reason  to  tax  notes  either  in  proportion  to  volume  or  to  length  of  time 
outstanding.  The  tax  might  be  regulated  so  as  to  become  prohibitive 
before  the  reserve  could  fall  to  what  might  be  regarded  as  the  danger 
point. 


CREDIT  AND  BANKING  539 

159.    THE  FEDERAL  RESERVE  ACT  OF  DECEMBER  23,  19 13 

I.  The  Organization  Scheme 

The  Federal  Reserve  Board. — The  Secretary  of  the  Treasury, 
the  Comptroller  of  the  Currency,  and  five  other  members 
appointed  by  the  President  to  serve  ten  years  at  a  salary  of 
$12,000  per  annum. 

The  Federal  Advisory  Council. — Twelve  members  on  one 
year  appointment. 

The  Federal  Reserve  Banks. — ^Twelve,  one  in  each  of  twelve 
districts.  Each  is  governed  by  a  board  of  nine  directors  on  a 
three-year  appointment. 

The  Member  Banks. — National  banks  and  other  ehgible  banks 
which  subscribe  to  the  stock  of  the  federal  reserve  bank  in  their 
district. 

II.  The  Federal  Reserve  Board 

The  powers  and  duties  of  the  Federal  Reserve  Board: 

"a)  To  examine  at  its  discretion  the  accounts,  books,  and 
affairs  of  each  federal  reserve  bank  and  of  each  member  bank 
and  to  require  such  statements  and  reports  as  it  may  deem 
necessary 

"b)  To  permit,  or,  on  the  afl&rmative  vote  of  at  least  five 
members  of  the  Reserve  Board  to  reqiiire  federal  reserve  banks 
to  rediscoimt  the  discounted  paper  of  other  federal  reserve 
banks  at  rates  of  interest  to  be  fixed  by  the  Federal  Reserve 
Board. 

"c)  To  suspend'  for  a  certain  limited  period  any  reserve 
requirements  specified  in  this  act:  Provided,  That  it  shall 
establish  a  graduated  tax  upon  the  amounts  by  which  the 
reserve  requirements  of  the  act  may  be  permitted  to  fall 
below  the  level  hereinafter  specified:  And  provided  further, 
That  when  the  gold  reserve  held  against  federal  reserve  notes 
falls  below  forty  per  centum,  the  Federal  Reserve  Board  shall 
establish  a  graduated  tax  of  not  more  than  one  per  centum 
per  annum  upon  such  deficiency  until  the  reserves  faU  to  thirty- 
two  and  one-half  per  centum,  and  when  said  reserve  falls  below 
thirty- two  and  one-half  per  centum,  a  tax  at  the  rate  increas- 
■  ingly  of  not  less  than  one  and  one-half  per  centum  per  annum 
upon  each  two  and  one-half  per  centum  or  fraction  thereof  that 
such  reserve  falls  below  thirty-two  and  one-haK  per  centum. 


540  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

"d)  To  supervise  and  regulate  through  the  bureau  under 
the  charge  of  the  Comptroller  of  the  Currency  the  issue  and 
retirement  of  federal  reserve  notes. 

"e)  To  exercise  general  supervision  over  said  federal  reserve 
banks. 

"/)  To  grant  by  special  permit  to  national  banks  applying 
therefor,  when  not  in  contravention  of  state  or  local  law,  the 
right  to  act  as  trustee,  executor,  administrator,  or  registrar  of 
stocks  and  bonds  under  such  rules  and  regulations  as  the  said 
board  may  prescribe." 

III.  The  Federal  Advisory  Council 

The  board  of  directors  of  each  federal  reserve  bank  selects 
one  member  and  arranges  for  his  compensation.  The  council 
must  meet  at  least  four  times  per  year.  As  indicated  by  its 
name,  its  functions  are  purely  advisory. 

IV.  The  Board  of  Directors  of  Each  Federal  Reserve  Bank 

1.  Nine  members,  of  three  classes,  holding  office  for  three 
years.  Class  A  is  representative  of  the  stockholding  banks; 
class  B  is  representative  of  commerce,  agriculture,  or  other 
industry  of  the  district;  class  C  represents  the  Federal  Reserve 
Board.  Only  members  of  class  A  may  be  active  bankers.  No 
senator  or  representative  may  be  on  the  board. 

2.  Members  of  class  C  are  appointed  by  the  Federal  Reserve 
Board.  One  of  them  shall  be  chairman  of  the  board  and 
Federal  Reserve  Agent.  Another  member  of  class  C  shall  be 
his  deputy.  Both  of  these  men  must  be  persons  of  tested  bank- 
ing experience. 

3.  Members  of  classes  A  and  B  are  to  be  elected  by  the  con- 
stituent member  banks  of  the  district  according  to  a  somewhat 
complicated  single-bank-single-vote,  electoral-college  scheme. 

4.  The  reserve  agent  represents  the  government  in  the  man- 
agement of  the  reserve  bank,  acts  as  intermediary  for  the  receipt 
of  government  deposits,  accepts  the  paper  offered  by  the  bank 
as  a  basis  for  the  issue  of  federal  reserve  notes,  and  generally 
reports  on  conditions  to  the  Federal  Reserve  Board  at  Wash- 
ington. 

V.  Federal  Reserve  Districts  and  Federal  Reserve  Banks 
I.  There  are  twelve  such  districts,  and  in  each  district  a 
federal  reserve  city  is  the  site  of  a  federal  reserve  bank. 


CREDIT  AND  BANKING  S4i 

2.  Every  national  bank  must  (or  cease  to  be  a  national 
bank)  and  other  eligible  banks  may  subscribe  to  the  stock  of 
the  federal  reserve  bank  in  their  district,  each  bank  subscribing 
to  the  amount  of  6  per  cent  of  its  paid  up  capital  and  surplus. 
The  minimum  subscribed  capital  of  a  federal  reserve  bank  is 
$4,000,000.  The  "other  eligible  banks"  referred  to  above  are 
incorporated  state  banks  which  meet  certain  conditions.  In 
important  particulars  these  conditions  are  similar  to  the  con- 
ditions laid  down  for  national  banks. 

3.  Each  federal  reserve  bank  is  to  establish  branches  in  its 
district. 

4.  Each  federal  reserve  bank  is  to  be  chartered  for  20  years. 

5.  Dividends  are  limited  to  a  6  per  cent  cimiulative  divi- 
dend. All  other  net  earnings  go  to  the  United  States  except 
that  one-half  of  such  other  net  earnings  are  to  go  to  a  surplus 
fund  until  that  fund  equals  40  per  cent  of  the  capital. 

VI.  Powers  of  Federal  Reserve  Banks 

1.  Note  issue  powers  (discussed  in  detail  elsewhere). 

2.  Power  to  act  as  fiscal  agents  of  the  United  States. 

3.  Power  for  each  bank  to  receive  deposits  from  any  of  its 
member  banks,  or,  solely  for  exchange  purposes,  from  other 
federal  reserve  banks. 

4.  Rediscount  power  as  follows:  " Upon  the  indorsement  of 
any  of  its  member  banks,  any  federal  reserve  bank  may  dis- 
count [to  a  certain  amount]  notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions;  but  such  defini- 
tion shall  not  include  notes,  drafts,  or  bills  covering  merely 
investments  or  issued  or  drawn  for  the  purpose  of  carrying  or 
trading  in  stocks,  bonds,  or  other  investment  securities,  except 
bonds  and  notes  of  the  government  of  the  United  States. 
Notes,  drafts,  and  bills  admitted  to  discount  under  the  terms 
of  this  paragraph  must  have  a  maturity  at  the  time  of  discount 
of  not  more  than  ninety  days:  Provided,  That  notes,  drafts, 
and  bills  drawn  or  issued  for  agricultural  purposes  or  based  on 
live  stock  and  having  a  maturity  not  exceeding  six  months  may 
be  discounted  in  an  amount  to  be  limited  to  a  percentage  of  the 
capital  of  the  federal  reserve  bank,  to  be  ascertained  and  fixed 
by  the  Federal  Reserve  Board " 

Any  federal  reserve  bank  may  discount  to  a  certain  amount 
acceptances  which  are  based  on  the  importation  or  exportation 


542  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  goods  and  which  have  a  maturity  at  the  time  of  discount  of 
not  more  than  three  months,  and  are  indorsed  by  at  least  one 
member  bank. 

5.  Power  to  engage  in  open-market  operations  in  the  pur- 
chase and  sale  of  "  cable  transfers  and  bankers'  acceptances  and 
bills  of  exchange  of  the  kinds  and  maturities  by  this  Act  made 
eligible  for  rediscount,  with  or  without  the  indorsement  of  a 
member  bank." 

6.  Power  to  deal  in  gold  coin  and  bullion  at  home  or  abroad. 

7.  Power  "to  buy  and  sell,  at  home  or  abroad,  bonds  and 
notes  of  the  United  States,  and  bills,  notes,  revenue  bonds,  and 
warrants  with  a  maturity  from  date  of  purchase  not  exceeding 
six  months,  issued  in  anticipation  of  the  collection  of  taxes,  or 
in  anticipation  of  the  receipt  of  assured  revenues  by  any  state, 
county,  district,  political  subdivision,  or  municipality  in  the 
continental  United  States,  including  irrigation,  drainage  and 
reclamation  districts." 

8.  Power  "to  establish  from  time  to  time,  subject  to  review 
and  determination  of  the  Federal  Reserve  Board,  rates  of  dis- 
count to  be  charged  by  the  federal  reserve  bank  for  each  class 
of  paper,  which  shall  be  fixed  with  a  view  of  accommodating 
commerce  and  business." 

9.  Power  "  to  establish  accounts  with  other  federal  reserve 
banks  for  exchange  purposes  and,  with  the  consent  of  the 
Federal  Reserve  Board  to  open  and  maintain  banking  accounts 
in  foreign  countries,  appoint  correspondents,  and  establish 
agencies  in  such  countries  wheresoever  it  may  deem  best  for 
the  purpose  of  purchasing,  selling,  and  collecting  bills  of  ex- 
change." 

10.  Authority  to  receive  deposits  from  their  member  banks 
and  from  the  government  of  the  United  States,  but  from  no 
other  source.  They  may  lend  to  their  member  banks  and  to 
the  government,  but  to  no  one  else. 

VII.  Note  Issues 

1.  Each  federal  reserve  bank  may  issue  notes  in  the  same 
manner  as  may  existing  national  banks  except  that  such  issue 
is  not  limited  to  the  capital  stock  of  the  federal  reserve  bank. 

2.  Federal  reserve  notes  of  the  denominations  $5,  $10,  $20, 
$50,  $100,  may  be  issued  at  the  discretion  of  the  Federal  Reserve 
Board  solely  for  the  purpose  of  making  advances  to  federal  re- 


CREDIT  AND  BANKING  543 

serve  banks.  These  notes  shall  be  "obligations  of  the  United 
States  and  shall  be  receivable  by  all  national  and  member  banks 
and  federal  reserve  banks  and  for  all  taxes,  customs,  and  other 
pubHc  dues.  They  shall  be  redeemed  in  gold  on  demand  at 
the  Treasury  Department  of  the  United  States,  in  the  city  of 
Washington,  District  of  Columbia,  or  in  gold  or  lawful  money 
at  any  federal  reserve  bank."  They  constitute  a  first  Uen  on 
assets.  These  notes  are  to  be  issued  through  the  federal  reserve 
agent  and  may  be  issued  to  the  full  amount  of  collateral  offered 
by  the  federal  reserye  bank.  The  collateral  shall  be  notes  and 
bills  accepted  for  rediscount.  These  federal  reserve  notes 
"shall  bear  upon  their  faces  a  distinctive  letter  and  serial  num- 
ber. No  federal  reserve  bank  shall  pay  out  notes  issued  through 
another  under  penalty  of  a  tax  of  ten  per  centum  upon  the  face 
value  of  notes  so  paid  out." 

3.  "Every  federal  reserve  bank  shall  maintain  reserves  in 
gold  or  lawful  money  of  not  less  than  thirty-five  per  centum 
against  its  deposits  and  reserves  in  gold  of  not  less  than  forty 
per  centum  against  its  Federal  reserve  notes." 

4.  "The  Federal  Reserve  Board  shall  require  each  federal 
reserve  bank  to  maintain  on  deposit  in  the  Treasury  of  the 
United  States  a  sum  in  gold  sufficient  in  the  judgment  of  the 
Secretary  of  the  Treasury  for  the  redemption  of  the  federal 
reserve  notes  issued  to  such  bank,  but  in  no  event  less  than 
five  per  centum;  but  such  deposit  of  gold  shall  be  counted  and 
included  as  part  of  the  forty  per  centiun  reserve  hereinbefore 
required." 

5.  The  federal  reserve  board  will  be  the  judge  of  what 
amoimt,  if  any,  of  these  federal  reserve  notes  shall  be  issued 
to  a  given  federal  reserve  bank,  and  shall  fix  the  rate  of 
interest  such  federal  reserve  bank  must  pay  for  these  notes. 

6.  Arrangements  are  made  for  having  federal  reserve  notes 
printed  and  deposited  in  conveniently  placed  sub-treasuries  so 
that  they  may  be  dehvered  promptly. 

7.  Provisions  are  made  for  taking  over  the  issue  of  present 
national  banks  wishing  to  surrender  their  issue. 

Note. — The  quantity  of  notes  that  can  issue  is  thus  limited  (i)  by 
the  quantity  of  eligible  commercial  paper  discounted  at  banks  and  then 
rediscounted  at  reserve  banks;  (2)  by  the  disposition  of  banks  to  ask 
for  notes;    (3)  by  the  disposition  of  the  federal  reserve  banks  to  get 


544  MATERIALS  FOR  ELEMEhfTARY  ECONOMICS 

such  notes  from  the  Federal  Reserve  Board  through  the  federal  reserve 
agent;   (4)  by  the  judgment  of  the  Federal  Reserve  Board. 

It  may  be  expected  that  the  national  bank  notes  will  remain  in 
circulation  somewhat  as  heretofore,  or  will  retire  from  circulation  very 
gradually. 

VIII.  Bank  Reserves 

1.  "A  bank  not  in  a  reserve  or  central  reserve  city  shall  hold 
and  maintain  reserves  equal  to  twelve  per  centum  of  the  aggre- 
gate amount  of  its  demand  deposits  (i.e.,  deposits  payable  on 
less  than  30  days'  notice)  and  five  per  centum  of  its  time 
deposits."  Four-twelfths  of  the  reserve  must  be  in  each  bank's 
own  vaults,  five-twelfths  in  the  vaults  of  the  federal  reserve 
bank.  The  other  three-twelfths  may  be  held  in  either  place 
or  in  both. 

2.  "  A  bank  in  a  reserve  city  shall  hold  and  maintain  reserves 
equal  to  fifteen  per  centum  of  the  aggregate  amount  of  its 
demand  deposits  and  five  per  centum  of  its  time  deposits." 
Five-fifteenths  of  the  reserve  must  be  in  each  bank's  own 
vaults,  six-fifteenths  in  the  vaults  of  the  federal  reserve  bank. 
The  other  four-fifteenths  may  be  held  in  either  place  or  in  both. 

3.  "A  bank  in  a  central  reserve  city  shall  hold  and  maintain 
a  reserve  equal  to  eighteen  per  centum  of  the  aggregate  amount 
of  its  demand  deposits  and  five  per  centum  of  its  time  deposits, 
in  its  vaults  six-eighteenths  thereof,  in  the  federal  reserve  bank 
seven-eighteenths,  the  balance  of  said  reserve  shall  be  held  in 
its  own  vaults  or  in  the  federal  reserve  bank,  at  its  option." 

4.  Any  federal  reserve  bank  may  receive  from  the  member 
banks,  as  reserves,  not  exceeding  one-half  of  each  instalment, 
certain  eligible  paper. 

5.  No  member  bank  shall  keep  on  deposit  with  any  non- 
member  bank  a  sum  in  excess  of  ten  per  centum  of  its  own 
paid-up  capital  and  surplus. 

Note  i. — The  former  reserve  requirements  for  national  banks  were: 
(a)  For  banks  in  central  reserve  cities  25  per  cent,  (b)  for  banks  in 
reserve  cities  25  per  cent,  of  which  one-half  might  be  deposited  in  central 
reserve  city  national  banks,  (c)  for  country  banks  15  per  cent,  of  which 
three-fifths  might  be  deposited  in  reserve  city  and  central  reserve  city 
national  banks.  ■' 

Note  2. — Reserves  will  be  much  more  highly  centralized  than  at 
present,  inasmuch  as  there  can  be  at  most  only  twelve  reserve  bank 
dties  as  against  the  fifty  reserve  and  central  reserve  cities  existing  at 
present. 


CREDIT  AND  BANKENG  S4S 

IX.  Miscellaneous  Provisions 

1.  The  Federal  Reserve  Board  may  "at  its  discretion  exer- 
cise the  fiinctions  of  a  clearing-house  for  such  federal  reserve 
banks,  or  may  designate  a  federal  reserve  bank  to  exercise  such 
functions,  and  may  also  require  each  such  bank  to  exercise  the 
fvmctions  of  a  clearing-house  for  its  member  banks." 

2.  National  Banking  Associations  are  no  longer  required  to 
deliver  to  the  United  States  Treasurer  a  stated  amount  of 
United  States  bonds  before  commencing  business. 

3.  Any  national  banking  association  not  situated  in  a  cen- 
tral reserve  city  may  make  loans  secured  by  improved  and 
unencumbered  farm  land,  situated  within  its  federal  reserve 
district,  but  such  loans  are  carefully  restricted. 

4.  Any  national  banking  association  possessing  a  capital  and 
surplus  of  $1,000,000  or  more  may  file  application  with  the 
Federal  Reserve  Board,  upon  such  conditions  and  imder  such 
regulations  as  may  be  prescribed  by  the  said  board,  for  the 
purpose  of  securing  authority  to  establish  branches  in  foreign 
countries  or  dependencies  of  the  United  States  for  the  further- 
ance of  the  foreign  commerce  of  the  United  States  and 
to  act,  if  required  to  do  so,  as  fiscal  agents  of  the  United 
States. 

5.  Provisions  are  made  which  will  enable  the  existing 
national  banks  gradually  to  retire  their  outstanding  note  issue, 
if  they  so  desire.  The  plan  to  be  used  involves  the  refunding 
to  such  2  per  cent  bonds  as  are  used  for  securing  note  issue 
into  3  per  cent  securities. 

160.    THE  CASE  AGAINST  STATE  GUARANTY  OF  BANK 

DEPOSITS' 

Looked  at  in  the  abstract  such  legislation  never  had  any  real  reason 
for  existence.  It  was  an  unwise  and  unjust  "remedy"  for  an  imagi- 
nary evil.  It  was  unwise  because  of  its  inevitable  tendency  to  lessen 
responsibility  in  bank  management,  its  weakening  of  the  incentives  for 
prudence  whether  in  fixing  interest  rates,  in  granting  accommodation, 

'Adapted  from  A.  Piatt  Andrew,  "The  Essential  and  the  Unessential  in 
Currency  Legislation,"  the  Page  Lecture  delivered  at  Yale  University,  May  i,  191?. 


546  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in  declaring  dividends,  or  in  building  up  a  surplus,  or  in  any  of  the 
other  matters  that  enter  into  the  conduct  of  a  bank.  It  was  unjust 
because  it  taxed  well-managed  institutions  for  the  consequences  of  bad 
judgment,  imprudence,  or  dishonesty  in  the  conduct  of  other  institu- 
tions, for  which  they  were  in  no  way  responsible,  and  which,  however 
aware  they  might  be  of  their  existence,  they  had  no  means  whatever 
to  prevent.  It  was  certainly  unfair  to  stockholders  in  carefully 
managed  banks  to  oblige  them  to  protect  persons  who  did  not  do  busi- 
ness with  them,  but  had  preferred  banks  of  less  conservative  poHcy. 
But  above  all  the  deposit  guaranty  legislation  was  uncalled  for.  The 
losses  entailed  upon  depositors  because  of  bank  failures  are  not  of 
sufficient  proportions  to  demand  so  drastic  a  remedy.  In  the  national 
banks  during  the  more  than  half-century  in  which  the  federal  system 
has  existed,  according  to  the  comptroller  of  the  currency,  these  losses 
have  amounted  on  the  average  to  only  about  3-100  of  i  per  cent  of  the 
aggregate  deposits,  and  there  is  no  evidence  to  show  that  the  losses 
have  been  any  greater  in  the  state-chartered  institutions,  except  in 
those  states  in  which  the  deposit  guaranty  has  been  operating. 

It  is  not  altogether  clear  just  what  was  aimed  at  by  the  deposit 
guaranty  agitators,  but  in  all  hkeUhood  the  objects  sought,  in  so  far  as 
they  were  reasonable  and  legitimate,  could  have  been  more  easily  and 
adequately  and  less  dangerously  attained  by  other  means.  If  what 
was  desired  was  to  utilize  the  service  and  security  of  the  government  in 
handling  the  savings  of  people  who  are  distrustful  of  banks,  and  so  to 
reduce  the  hoarding  of  actual  cash,  this  object  has  been  far  more 
satisfactorily  attained  by  the  establishment  of  the  postal  savings 
system  and  the  issue  of  postal  savings  bonds  in  small  denominations. 
If,  however,  what  was  desired  was  to  make  it  possible  for  a  bank  at  its 
discretion  to  insure  its  depositors  against  loss  in  case  of  insolvency, 
which  would  seem  to  have  been  the  object  in  the  states  where  the 
"voluntary"  system  was  adopted,  this  could  have  been  accom- 
plished, as  the  decisions  of  the  Supreme  Court  have  shown,  without 
further  legislation  through  the  agency  of  private  insurance  firms. 
But  if  what  was  desired  was  to  insure  to  depositors  in  thoroughly 
solvent  banks  the  immediate  availability  of  their  deposits  at  all  times, 
this  end  would  be  best  accomplished,  not  by  making  the  assets  of 
such  banks  Uable  for  the  debts  of  insolvent  institutions,  but  by  adding 
to  our  present  banking  system  such  facilities  as  would  insure  to  solvent 
banks  the  possibility  of  always  translating  their  sound  assets  immedi- 
ately and  without  limit  into  available  funds.  This  is  the  fundamental 
desideratum  of  our  currency  system. 


XII.    INTERNATIONAL  TRADE  AND   FOREIGN 

EXCHANGE 

i6i.    THE  FOREIGN  TRADE  OF  THE  UNITED  STATES,  1912-13' 

The  detailed  figures  given  by  the  Department  of  Commerce  show 
that  the  fiscal  year  ended  June  30,  1913,  was  the  banner  year  in  the 
trade  of  the  United  States  with  foreign  countries,  the  total  trade 
exceeding  $4,275,000,000  and  surpassing  the  total  trade  of  the  fiscal 
year  191 2  by  over  $421,000,000.  Imports  into  the  United  States  in 
the  year  exceeded  $1,812,000,000  and  exports  from  this  country 
exceeded  $2,465,000,000,  making  a  balance  of  trade  in  our  favor  of 
over  $652,900,000.  The  imports  surpassed  those  of  the  fiscal  year 
1912  by  over  $159,700,000,  and  the  exports  were  more  than  $261,500,- 
000  greater  than  those  of  last  year. 

A  survey  shows  that  the  greatest  gain  in  our  exports  is  in  manu- 
factures ready  for  consumption,  in  which  class  there  was  an  increase 
of  more  than  $105,000,000  over  1912.  There  was  also  a  substantial 
gain  of  over  $60,000,000  in  manufactures  for  further  use  in  manu- 
facturing, but  the  increase  in  foodstuffs  partly  or  wholly  manufactured 
was  only  a  little  over  $1,500,000. 

Looking  at  the  figures  by  grand  divisions  it  will  be  seen  that  the 
aggregate  trade  of  the  United  States  with  Europe  in  the  fiscal  year 
just  ended  was  over  $2,371,000,000,  or  more  than  one-half  our  total 
foreign  trade.  This  was  divided  into  over  $892,000,000  worth  of 
imports  and  $1,479,000,000  worth  of  exports,  a  balance  of  trade  in 
our  favor  of  more  than  $586,000,000.  The  aggregate  trade  with  the 
other  countries  of  North  America  exceeded  $979,000,000,  of  which 
over  $361,900,000  were  imports  and  over  $617,400,000  were  exports 
The  remainder  of  our  foreign  trade,  amounting  to  about  $925,000,000, 
was  divided  among  Asia,  South  America,  Oceania  and  Africa,  in  the 
order  named. 

The  United  Kingdom  maintains  its  position  as  our  best  customer, 
having  purchased  from  us  over  $597,000,000  and  sold  us  over  $295,- 
000,000  in  the  year,  an  aggregate  trade  of  more  than  $892,000,000. 
Our  second  best  customer  is  Canada,  which  bought  from  us  over 
$415,000,000  and  sold  us  over  $120,000,000,  a  total  trade  exceeding 
$535,000,000.  Third  comes  Germany,  which  bought  from  us  over 
$331,000,000  and  sold  us  only  a  little  less  than  $189,000,000,  an 

•  From  The  Journal  of  Commerce  and  Commercial  Bulletin,  August  7,  1913. 

547 


548 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


aggregate  trade  of  more  than  $520,000,000.  France  is  fourtli  with 
purchases  from  us  m  excess  of  $146,000,000  and  sales  to  us  in  excess 
of  $136,000,000,  a  total  trade  of  over  $282,000,000. 

Merchandise  Imported  from   and  Exported  to  Each  op  thi 

Principal  Countries  During  the  Fiscal  Year  Ended 

June  30,  19 13  (000  Omitted) 


Grand  divisions — 

Europe , 

North  America .  .  . 
South  America. . . , 

Asia 

Oceania 

Africa , 

Total 

Principal  coimtries — 

Argentina , 

Australia 

Belgium 

Brazil , 

Canada , 

China 

Cuba , 

France 

Germany 

India,  British.  ... 

Italy 

Japan , 

Mexico 

Netherlands , 

Russia , 

United  Kingdom.  , 


Imports 


Exports 


$892,866 

$1,479,076 

361,943 

617,411 

217,747 

146,147 

276,452 

115,056 

37,543 

79,102 

26,425 

29,088 

$1,812,978 

$2,465,884 

$26,863 

$52,894 

10,956 

43,351 

41,941 

66,845 

120,155 

42,638 

120,571 

415,260 

39,010 

21,326 

126,088 

70,581 

136,877 

146,100 

188,963 

331,684 

67,936 

1 1 ,040 

54,107 

76,285 

91,633 

57,741 

77,543 

54,571 

38,180 

125,909 

29,3^5 

26,465 

295,564 

597,150 

Imports  and  Exports  of  the  United  States,  by  Great  Groups, 
During  Fiscal  Year  Ended  June  30,  1913  (000  OMirTEo) 


Imports 

Exports 

Groups — 

Foodstuffs  in  crude  condition 
and  food  animals 

$211,458 
194,680 

633,224 
348,886 

410,608 
14,120 

$181,693 

320,401 

730,963 
408,902 

Foodstuffs    partly    or    wholly 
manufactured 

Crude    materials    for    use    in 
manufacturing 

Manufactures  for  further  use 
in  manufacturing 

Manufactures   ready   for  con- 
sumption   

778,008 

Miscellaneous 

8,447 

Foreign  merchandise  exported 

37,377 

Totals 

$1,812,978 

$2,465,884 

INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        549 

162.    THE  TRADE  BALANCE  OF  THE  UNITED  STATES' 

The  term  "trade  balance"  is  generally  used  for  the  purpose  of 
indicating  the  excess  value  of  a  country's  exports  of  merchandise 
over  the  value  of  its  imports  of  merchandise  or  the  excess  value  of  a 
country's  imports  of  merchandise  over  the  value  of  its  exports  of 
merchandise.  In  the  sixteenth,  seventeenth,  and  eighteenth  cen- 
turies a  favorable  trade  balance  was  a  matter  of  great  concern  to 
statesmen  and  to  financiers.  At  that  time  it  was  supposed  that 
any  country  which  imported  goods  of  greater  value  than  the  goods 
it  exported  would  be  seriously  injured  by  having  to  make  payment 
in  the  precious  metals  and  that  any  country  which  persisted  in  pur- 
chasing goods  of  greater  value  than  the  goods  it  exported  would  be 
totally  drained  of  its  stock  of  the  precious  metals  and  would  be 
ruined.  Efforts  to  secure  favorable  trade  balances  led  to  the  passage 
of  many  laws  for  restricting  imports  and  for  stimulating  exports. 
As  commerce  developed  and  international  banking  advanced  it  was 
recognized  that  a  nation  could  under  certain  circumstances  purchase 
goods  of  a  greater  aggregate  value  than  it  exported,  without  sustain- 
ing any  drain  upon  its  stock  of  the  precious  metals  or  suffering  any 
inconvenience  whatsoever,  and  in  recent  time  no  one  has  paid  any 
great  amount  of  attention  to  the  question  of  the  trade  balance  other 
than  for  the  purpose  of  ascertaining  the  factors  which  caused  the 
imports  of  certain  countries  largely  to  exceed  their  exports  or  of  dis- 
covering the  reason  for  the  exports  of  certain  countries  largely 
exceeding  their  imports. 

I.      CAPITAL   INVESTMENTS   AND   TRADE   BALANCES 

When  a  country  commences  to  invest  capital  in  other  lands  its 
exports  begin  to  exceed  its  imports.  Capital  investment  by  one 
country  in  other  lands  means  that  that  country  is  willing  to  sell 
goods  to  other  lands,  and  to  take  payment  in  securities  of  one  class 
or  another.  Should  the  capital  investments  extend  over  only  one 
year  the  exports  of  the  lending  country  in  the  year  in  which  the 
loan  is  made  would  exceed  its  imports  to  the  extent  of  the  sum 
invested.  Should  no  additional  investments  be  made,  the  imports 
of  the  lending  country  in  the  following  years  would  exceed  its  exports 
to  the  extent  of  the  interest  or  dividends  it  received  upon  the  capital 
invested.    As  time  goes  on,  and  the  total  amount  of  cap»ital  invested 

»  Adapted  from  George  Paish,  The  Trade  Balance  of  the  United  States,  pp.  153-97, 
National  Monetary  Commission,  19 10. 


5SO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

by  it  in  other  lands  attains  to  larger  and  larger  figures,  the  annual  sum 
received  as  interest  upon  the  capital  embarked  rises  correspond- 
ingly. In  this  case  the  balance  of  exports  over  imports  resulting 
from  the  investment  of  capital  becomes  smaller  and  smaller  in  conse- 
quence of  the  increasing  sums  received  per  contra  from  the  interest 
upon  the  capital  previously  invested.  After  a  time  the  annual  sums 
which  a  lending  country  receives  for  interest  exceed  the  additional 
sums  it  lends  in  each  year,  and  in  spite  of  its  continued  investment 
of  capital  in  other  lands  its  imports  exceed  its  exports. 

In  the  same  way  the  trade  balances  of  countries  which  borrow 
capital  from  other  lands  are  affected  by  the  produce  they  import 
in  respect  of  the  capital  they  borrow  and  by  the  export  of  produce 
for  the  payment  of  interest.  A  country  beginning  to  borrow  from 
other  lands  imports  a  larger  amount  of  produce  than  it  exports. 
When  the  interest  payments  of  a  borrowing  country  amount  to  large 
figures,  its  exports  appreciably  exceed  its  imports  even  in  years  in 
which  it  borrows  freely. 

There  is  practically  no  country  which  neither  exports  nor  imports 
capital,  with  the  exception  of  Thibet.  This  type  of  country  may  be 
left  out  of  consideration.  The  chief  countries  which  supply  capital 
to  other  lands  are  Great  Britain,  Germany,  France,  Holland,  Bel- 
gium, and  Switzerland.  Of  these  countries.  Great  Britain  is  by  far 
the  most  important  lender.  This  country  has  about  $15,000,000,000 
of  capital  invested  abroad  and  is  adding  to  its  colonial  and  foreign 
investments  at  the  rate  of  upward  of  $500,000,000  a  year.  Ger- 
many and  France  come  next  with  investments  of  about  $8,000,000,- 
000  each.  The  investments  of  Holland,  Belgium,  and  Switzerland 
are  of  much  smaller  amount,  but  are  nevertheless  considerable.  The 
imports  of  all  these  five  countries  largely  exceed  their  exports  in 
consequence  of  the  receipt  of  interest. 

The  principal  countries  whose  exports  exceed  their  imports  in 
consequence  of  the  large  amount  of  interest  they  have  to  pay  on  capi- 
tal borrowed  from  other  lands  are  the  United  States,  the  Austral- 
asian colonies  of  Great  Britain,  British  India,  Argentina,  Brazil, 
and  Mexico.  Several  other  countries  whose  imports  now  exceed 
their  exports  will  eventually  come  into  this  category.  At  the  present 
time  Canada's  imports  largely  exceed  her  exports  in  consequence  of 
the  vast  amount  of  capital — about  $200,000,000  a  year — which  she 
is  borrowing  from  other  lands — almost  entirely  from  Great  Britain. 
In  the  course  of  time  the  Canadian  indebtedness  to  other  coimtries 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        551 

and  the  expenditures  of  her  tourists,  etc.,  will  be  so  great  that  her 
exports  will  exceed  her  imports,  although  large  amounts  of  capital 
will  continue  to  flow  into  the  country  each  year.  Of  course  Canada 
will  have  no  difficulty  in  making  these  interest  payments,  having 
regard  to  the  rapid  growth  in  the  annual  amount  of  wealth  created 
by  means  of  the  capital  she  is  importing.  China,  Japan,  and  Chile 
are  other  instances  of  borrowing  countries  whose  imports  exceed 
their  exports  in  consequence  of  the  inflow  of  large  amounts  of  foreign 
capital. 

II.    Europe's  capital  investments  in  the  united  states 

Almost  from  the  day  that  it  was  discovered  the  United  States  has 
obtained  supplies  of  capital  from  Europe.  In  the  sixteenth,  seven- 
teenth, and  eighteenth  centuries  the  capital  was  imported  for  the 
development  of  sugar,  tobacco,  and  cotton  plantations  and  for  mer- 
cantile purposes.  Early  in  the  nineteenth  century  large  sums  of 
money  were  invested  by  Great  Britain  in  the  securities  of  the  United 
States  government  and  in  state  and  municipal  government  bonds. 
The  appUcation  of  steam  to  land  traction  greatly  widened  the  need 
for  capital  in  the  United  States,  and  London  was  asked  for  capital 
for  railway  construction.  But  it  was  not  until  the  fifties  and  sixties 
that  any  large  amount  of  capital  was  raised  m  London  for  railway 
construction. 

In  the  fifties,  sixties,  and  early  seventies  large  sums  of  capital 
were  invested  by  Europe,  mainly  by  Great  Britain  and  Holland,  in 
the  federal  and  state  government  loans,  in  municipal  securities,  in 
railroad  bonds  and  stocks,  and  in  the  shares  of  land,  mining,  and  other 
ventures.  But  the  chief  borrowers  were  railways.  By  1883  the 
amount  of  American  railway  securities  quoted  in  London  amounted 
to  the  large  total  of  $1,535,000,000.  Since  the  early  eighties  the 
accumulation  of  capital  in  the  United  States  itself  has  been  on  a 
great  scale,  and  the  federal  and  state  governments  have  been  able  to 
borrow  at  home  at  lower  rates  of  interest  than  the  rates  at  which  they 
could  obtain  capital  from  the  investors  of  Europe.  But  the  amounts 
of  capital  needed  by  American  railways  have  been  beyond  the  powei 
of  the  American  people  to  supply,  and  large  amounts  of  capital  have 
been  invested  by  Europe  in  American  railway  and  other  securities. 
At  the  end  of  1908  the  securities  of  American  railways  quoted  in  the 
London  Stock  Exchange  "official  list"  were  of  the  nominal  value 
of  $7,500,000,000.     Further,  there  are  a  large  number  of  American 


552  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

industrial  and  other  securities  quoted  in  London  which  raises  the 
total  to  over  $9,000,000,000.  Only  a  portion  of  this  vast  amount  of 
securities  quoted  in  London  is  owned  by  British  investors.  Great 
Britain  possesses  about  $3,500,000,000  of  American  securities.  To 
tliis  sum  has  to  be  added  the  considerable  amounts  invested  by  the 
Continent.  Large  amounts  of  German,  Dutch,  and  French  capital 
are  embarked  in  American  undertakings,  principally  railways.  A 
statement  drawn  up  in  1902  at  the  instance  of  the  French  minister  of 
fmance  from  reports  supplied  by  French  diplomatic  agents  and  con- 
suls in  various  parts  of  the  world  placed  the  total  amount  of  French 
capital  invested  at  that  time  in  the  United  States  at  600,000,000 
francs,  or  $120,000,000,  but  this  figure  appears  to  have  been  an  under- 
estimate. It  is  true  that  few  issues  of  American  securities  are  pub- 
licly quoted  on  the  Paris  Bourse,  but  relatively  large  amounts  have 
been  purchased  privately  by  French  investors  in  London  and  in  New 
York,  The  French  investments  in  the  United  States,  including  the 
Pennsylvania  Railroad  and  other  loans  placed  in  Paris  since  1902, 
amount  to  nearly  2,500,000,000  francs,  or  $500,000,000. 

Estimates  of  the  amount  of  capital  invested  by  Germany  in  the 
United  States  were  made  in  1905  by  the  German  Admiralty  and  pub- 
lished in  a  work  entitled  Die  Entwicklung  der  deutschen  Seeinteressen 
ini  letzlen  Jahrzehnt.  ♦These  estimates  placed  the  amount  of  German 
capital  in  the  United  States  and  Canada  in  1904  at  from  2,500,000,000 
marks  to  3,000,000,000  marks,  say,  $625,000,000  to  $750,000,000. 
Since  1904  considerable  additional  sums  of  German  capital  have  been 
invested  in  the  United  States.  German  bankers  place  the  amount 
of  the  German  investments  in  American  securities  at  about  $1 ,000,000,- 
000.  The  amount  of  Dutch  capital  in  the  United  States  is  about 
$750,000,000.  American  securities  are  also  held  in  Belgium,  Switzer- 
land, and  in  other  countries.  In  the  aggregate  the  amount  of  Euro- 
pean capital  invested  in  "permanent"  securities  in  the  United  States 
is  approximately  $6,000,000,000. 

Beyond  the  fixed  capital  invested  by  Europe  in  the  United  States 
account  has  to  be  taken  of  the  floating  loans  made  by  Europe  to 
America.  These  floating  loans  are  mainly  incurred  in  the  spring  and 
summer  months  in  anticipation  of  the  produce  shipments  from  the 
States  in  the  fall  months  and  they  are  then  largely  liquidated.  The 
amount  of  the  floating  debt  of  the  United  States  to  Europe  in  the  form 
of  produce  bills,  finance  bills,  loans  against  securities,  overdrafts, 
etc.,  averages  about  $400,000,000,  reaching  a  larger  sum  in  July  and 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        553 

* 

early  August  and  falling  to  a  much  lower  sum  at  the  end  of  December. 
The  rate  of  interest  paid  upon  this  floating  debt,  in  so  far  as  it  consists 
of  produce  bills,  is  a  very  low  one,  the  rate  of  interest  charged  on  this 
class  of  loan  being  less  than  that  on  any  other  kind  of  security. 

Including  both  the  fixed  investments  and  the  floating  loans,  the 
amount  of  capital  borrowed  by  the  United  States  from  other  countries 
is  about  $6,500,000,000,  the  annual  interest  charge  upon  which  is 
about  $300,000,000. 

An  offset  to  the  large  amount  of  capital  invested  in  the  United 
States  is  the  capital  invested  by  American  citizens  in  other  countries, 
more  especially  in  Mexico,  Canada,  in  the  South  American  States,  in 
the  Philippines,  in  Cuba,  etc.  The  amount  of  American  capital 
invested  in  other  lands  in  this  manner  both  publicly  and  privately  is 
probably  $1,500,000,000,  yielding  an  income  of  about  $75,000,000 
a  year.  By  deducting  the  interest — $75,000,000 — received  upon 
American  capital  placed  abroad  from  the  interest — $300,000,000 — 
which  the  United  States  pay  upon  capital  supplied  to  them  by  other 
lands,  I  arrive  at  a  net  payment  of  $225,000,000  by  the  United  States 
to  other  countries  for  interest  and  dividends  upon  capital.  This  sum 
the  United  States  has  to  remit  each  year  by  exports  of  produce. 

III.   TOURIST  AND  OTHER  EXPENDITURES  * 

The  number  of  American  citizens  visiting  other  lands  in  the 
course  of  the  year  is  now  upward  of  200,000.  The  data  I  have  been 
able  to  obtain  as  to  the  expenditures  of  these  tourists  show  that  the 
sum  expended  by  them  approximates  $1,000  per  person.  This  sum 
includes  merely  the  passage  money  and  the  sums  expended  in  other 
countries  for  food,  transportation,  and  other  miscellaneous  expendi- 
tures. It  does  not  include  the  sums  expended  upon  works  of  art, 
jewelry,  clothing,  etc.,  which  are  declared  at  the  customs  and  are 
included  in  the  value  of  the  goods  imported  into  the  United  States. 
In  the  aggregate,  tourist  expenditures  for  the  purpose  I  have  men- 
tioned reach  a  total  of  about  $200,000,000.  On  the  other  hand,  a 
number  of  foreign  tourists  visit  the  United  States  and  their  expendi- 
tures should  be  placed  against  those  of  American  citizens.  Appar- 
ently the  number  of  visitors  is  about  30,000.  The  expenditures  of 
visitors  to  the  United  States  may  be  taken  at  about  $1,000  per 
person,  excluding  all  shipping  transportation,  or  an  aggregate  sum 
of  visitors'  expenditures  in  the  United  States  of  $30,000,000.    On 


554  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

balance,  therefore,  the  United  States  has  to  pay  to  other  countries 
a  sum  of  about  $170,000,000  a  year  to  cover  tourist  expenditures. 

rV.      EXPENDITURES  OF  IMMIGRANTS  AND  EMIGRANTS 

There  is  another  movement  of  population  which  creates  large 
debit  and  credit  items  in  the  American  trade  balance.  Each  year  a 
considerable  number  of  persons,  who  previously  had  migrated  to 
the  United  States,  return  to  take  up  their  residence  in  Europe. 
The  numbers  of  these  persons  greatly  fluctuate.  In  the  four  years 
previous  to  1907  they  averaged  somewhat  over  300,000  a  year.  The 
average  amount  of  money  carried  by  the  300,000  "emigrants"  who 
leave  the  United  States  each  year  is  not  a  very  large  sum;  on  the 
average  it  was  probably  not  more  than  $200  per  head,  or  a  total  sum 
of  about  $60,000,000.  On  the  other  hand,  account  has  to  be  taken  of 
the  money  brought  in  by  immigrants  from  other  lands.  The  average 
sum  brought  into  the  country  is  about  $50  per  head.  In  the  aggre- 
gate the  money  brought  into  the  country  by  immigrants  probably 
reaches  $50,000,000  per  annum. 

For  all  practical  purposes  I  calculate  that  the  money  brought  into 
the  country  by  immigrants  about  counterbalances  the  money  taken 
out  of  the  country  by  emigrants  returning  to  their  native  lands  and 
By  "other  than  cabin  passengers"  visiting  other  countries. 

V.      REMITTANCES   TO   FRIENDS 

The  great  prosperity  of  the  United  States  enables  many  of  its 
citizens  who  have  come  from  other  lands  to  make  gifts  of  large  sums 
of  money  in  the  aggregate  to  friends  in  the  old  countries.  The 
remittance  of  this  money  means  that  the  United  States  have  to  send 
considerable  quantities  of  produce  abroad  for  which  there  is  no 
corresponding  item  on  the  import  side  of  the  account,  as  the  produce 
goes  for  the  purpose  of  providing  the  funds  necessary  to  cash  the 
postal  money  orders  and  other  drafts  remitted  to  friends.  The  amount 
of  these  remittances  is  exceedingly  difficult  to  calculate,  but  that  it 
is  large  everyone  admits.  Mr.  Charles  F.  Speare  estimates  that 
out  of  the  savings  of  the  foreign-born  in  America  $250,000,000  a  year 
are  going  abroad  and  that  the  annual  rate  of  increase  is  about  10  per 
cent.  The  annual  distribution  of  this  great  sum  throughout  Europe 
is,  he  says,  in  the  following  proportions: 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        555 

Italy $70,000,000 

Austria-Hungary 65,000,000 

Great  Britain 25,000,000 

Norway  and  Sweden 25,000,000 

Russia 25,000,000 

Germany 1 5,000,000 

Greece 5,000,000 

All  others,  including  France,  Switzerland,  Bel- 
gium, and  Denmark 10,000,000 

From  the  data  I  have  been  able  to  obtain,  I  cannot  confirm  tht 
calculation  that  the  remittances  to  friends  are  as  much  as  $250,- 
000,000  a  year.  In  the  first  place,  a  portion  of  this  money  is  remitted 
by  persons  returning  to  live  in  Europe,  whose  remittances  I  have 
already  allowed  for.  Secondly,  many  of  the  money  orders  and 
drafts  are  sent  to  Europe  to  pay  for  goods  purchased.  Very  large 
numbers  of  small  parcels  of  goods  are  imported  and  figure  in  the 
imports  of  produce.  These  small  parcels  are  usually  paid  for  by  small 
drafts  or  by  postal  money  orders.  With  the  data  at  my  disposal 
I  do  not  feel  justified  in  placing  the  amomit  of  money  remitted  by 
American  citizens  to  friends  in  other  countries  at  a  larger  figure 
than  $150,000,000.  This  is  still  a  very  large  sum,  and  is  a  factor  of 
great  importance  in  calculating  the  trade  balance  of  the  United  States 
and  the  amount  of  produce  which  has  to  be  remitted  for  various  pur- 
poses other  than  to  pay  for  goods  imported. 

VI.      FREIGHTS 

The  United  States  possesses  a  mercantile  marine  large  enough  to 
convey  but  a  small  portion  of  the  produce  they  export  and  import, 
and  considerable  payments  have  to  be  made  for  shipping  services. 
In  1907-8  the  imports  into  the  United  States  by  sea  were  valued  at 
$1,123,000,000.  Of  this  amount  13 . 5  per  cent  was  carried  in  Ameri- 
can vessels  and  86 . 5  per  cent  in  foreign  vessels.  In  the  same  year 
the  exports  from  the  United  States  were  valued  at  $1,670,000,000, 
of  which  amount  the  produce  conveyed  in  American  vessels  was 
only  7 .  2  per  cent  and  the  balance  of  93 . 8  per  cent  was  conveyed  in 
foreign  vessels.  The  sum  which  the  United  States  had  to  pay  to 
other  lands  for  marine  transportation  is  much  smaller  than  is  usually 
calculated.  In  the  first  place,  other  countries  have  to  pay  the  cost 
of  transporting  the  produce  they  purchase  from  the  United  States, 
and  there  is  no  burden  upon  America  for  freight  upon  goods  shipped 


5 $6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  Other  lands.  Indeed,  there  is  a  credit  item  on  goods  exported, 
inasmuch  as  7 . 2  per  cent  of  the  whole  of  the  goods  exported  in  1907-8 
was  conveyed  in  American  vessels.  The  freight  which  the  United 
States  has  to  pay  for  is  that  upon  the  imports  conveyed  in  foreign 
vessels  less  the  freight  earned  by  American  vessels  in  conveying 
exports.  Thus  the  net  amount  of  freight  payable  is  in  respect  of 
goods  amounting  in,  value  to  about  $850,000,000.  There  are,  how- 
ever, other  credit  items  to  be  taken  into  consideration.  The  foreign 
vessels  carrying  goods  from  the  United  States  to  other  countries  are 
usually  coaled  and  provisioned  for  the  outgoing  voyage  in  American 
ports,  and  the  value  of  the  coal  and  provisions  supplied  to  them  must 
be  deducted  from  the  payments  which  the  United  States  has  to  make 
for  freight  brought  into  the  country  in  foreign  vessels.  After  taking 
all  these  factors  into  consideration  I  calculate  that  the  net  sum 
which  the  United  States  pays  to  other  comitries  for  the  transporta- 
tion of  merchandise  is  about  $25,000,000  per  annum.  Payment  of 
this  sum  has  also  to  be  remitted  to  other  lands  by  exports  of  produce. 

Vn.      INSURANCE 

A  large  amount  of  fire  insurance  is  written  each  year  in  the  United 
States  by  English  and  other  oflfices  and  the  sums  payable  to  those 
offices  in  respect  of  insurance  reaches  a  considerable  figure.  On  the 
other  hand,  the  fire  losses  of  foreign  offices  in  the  United  States  are 
heavy  and  the  profit  which  alone  accrues  to  other  countries  is  not  a 
large  item;  at  any  rate  it  has  not  been  a  large  item  in  the  recent  past. 
On  the  other  hand,  American  life-assurance  offices  transact  a  fairly 
large  business  in  foreign  countries.  Here  again  the  claims  have  to  be 
placed  against  the  premiums  received  and  the  net  sum  coming  to  the 
United  States  is  not  an  important  item.  In  recent  years  the  experi- 
ence of  American  life  offices  has  been  abnormal.  They  have  trans- 
acted very  little  new  foreign  business  and  their  claims  have  represented 
a  much  larger  proportion  of  their  premium  income  than  usual.  Still, 
this  situation  will  doubtless  pass  away  and  America  will  receive  the 
normal  amount  of  income  from  the  business  transacted  in  other  lands 
by  her  life-insurance  offices.  On  balance,  if  all  kinds  of  insurance  and 
assurance  are  combined,  America  probably  has  to  pay  very  Uttle  on 
balance  to  other  lands  and  the  factor  of  insurance  in  calculating  the 
trade  balance  may  consequently  be  ignored. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        557 

Vni.      SUMMARY   OF   REMITTANCES    FOR    INTEREST,   TOURIST   EXPENDI- 
TURES, GIFTS   TO   FRIENDS,  AND   FREIGHT  CHARGES 

Thus  I  arrive  at  the  conclusion  that  the  United  States  have  on 
balance  to  pay  other  countries  a  net  sum  of  $250,000,000  for  interest 
upon  foreign  capital  invested  with  them;  that  the  expenditures  of 
American  citizens  in  other  lands  exceed  by  $170,000,000  the  outlays 
of  foreign  tourists  in  the  United  States;  that  the  remittances  of  foreign- 
born  citizens  to  friends  in  Europe  and  elsewhere  amount  to  $150,000,- 
000,  and  that  the  net  sum  paid  for  ocean  freight  to  other  countries  is 
$25,000,000.  In  other  words,  the  exports  of  merchandise,  gold,  and 
silver  from  the  United  States  must  exceed  the  aggregate  value  of  the 
merchandise,  gold,  and  silver  imported  by  nearly  $600,000,000  in  order 
that  payment  may  be  made  for  interest,  tourist  expenditures,  etc. 
That  is  to  say,  America  requires  an  excess  of  exports  over  imports 
of  nearly  $600,000,000  per  annum  in  order  to  settle  her  trade  balance. 
If  she  has  a  larger  balance  of  exports  over  imports  than  this  figure,  she 
is  repaying  a  portion  of  her  obligations  to  other  lands.  If  she  has  less 
than  this  sum,  she  is  borrowing  additional  capital  from  other  lands. 
It  should,  however,  be  clearly  understood  that  this  amount  is  subject 
to  wide  fluctuations,  and  is  by  no  means  a  hard-and-fast  obligation. 
The  interest  upon  foreign  capital  invested  in  the  country  fluctuates 
to  some  extent  with  the  rate  of  dividend  earned  upon  the  capital 
invested.  If  the  country  is  in  depression,  the  rate  of  dividend  on  much 
of  the  capital  declines,  and  if  the  nation  is  prosperous  it  advances. 
The  figure  given  is  calculated  upon  the  return  upon  capital  in  recent 
years.  Again,  the  tourist  expenditures  vary  widely.  In  years  of 
trade  activity  and  prosperity  American  visitors  to  Europe  and  other 
countries  spend  money  freely,  whereas  in  years  of  depression  they  are 
more  economical.  Further,  the  gifts  of  American  citizens  to  their 
friends  in  Europe  fluctuate  with  the  condition  of  trade.  In  a  period 
of  depression  the  gifts  are  appreciably  smaller  than  in  years  of  activity. 
In  this  respect,  however,  it  should  be  noted  that  depression  in  trade 
causes  a  great  many  persons  to  return  to  Europe;  that  these  persons 
take  with  them  large  sums  of  money,  and  that  this  outflow  of  money  has 
to  be  placed  against  the  smaller  gifts  to  friends  at  such  times.  Taking 
all  these  circumstances  into  account,  I  calculate  that  in  a  year  of 
depression  the  obligation  of  the  United  States  to  other  countries 
for  interest,  tourist  expenditures,  remittances  to  friends,  freight,  etc., 
is  about  $500,000,000  and  that  in  years  of  normal  trade  activity  it  is 
about  $600,000,000. 


558  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Perhaps  the  situation  will  be  more  clearly  realized  if  I  set  it  out  in 
tabular  form: 

Foreign  Trade  of  the  United  States,  1908-9 

Merchandise: 

Exports — 
Domestic.    $1,6^8,000,000 
Foreign...  25,000,000 


Total...  $1,663,000,000 

Imports 1,312,000,000 

Excess  of  merchandise  exports  over  imports.  $351,000,000 

Gold: 

Exports $92,000,000 

Imports 44,000,000 

Excess  of  gold  exports  over  imports 48,000,000 

Silver: 

Exports $56,000,000 

Imports 44,000,000 


Excess  of  silver  exports  over  imports 12,000,000 


Total  excess  of  merchandise,  gold,  and  silver  exports  over 

imports $411,000,000 

Remittances  for  interest,  etc.: 

Interest $250,000,000 

Tourist  expenditures 170,000,000 

Remittances  to  friends 1 50,000,000 

Freight 25,000,000 


Total  remittances 595,000,000 


Excess  of  sum  remitted  for  interest,  tourists,  to  friends, 

and  for  freights,  over  trade  balance $184,000,000 

This  balance  of  $184,000,000  has  been  liquidated  by  permanent 
or  temporary  investments  of  capital  by  other  countries  in  the  United 
States. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        559 

163.    THE  BALANCE  OF  TRADE  AND  GOLD  SHIPMENTS' 

About  midday,  on  Monday,  a  wagon  backed  up  to  the  steps  of 
the  Assay  Office,  the  most  antiquated  building  on  Wall  Street,  and 
out  jumped  a  couple  of  men  who  were  joined  by  others  from  inside 
the  building.  A  plank  was  run  out,  up  to  the  door,  along  which,  in 
rapid  succession,  forty  kegs  were  rolled  into  the  wagon,  each  numbered 
and  stenciled  with  the  letters  "L.  F."  and  duly  recorded  by  a  clerk 
who  stood  by.  When  all  were  aboard,  the  plank  was  drawn  in  and 
away  rolled  $2,000,000  in  gold  bars,  for  export  to  France. 

Thus  one  saw,  in  the  simple  operation,  the  practical  working-out 
of  an  international  movement  of  credits,  brought  down  to  its  ultimate 
settlement.  As  many  watched  the  operation,  someone  remarked: 
"Is  it  not  a  strange  thing  that,  notwithstanding  the  efficiency  to 
which  modern  banking  has  been  brought,  in  the  last  resort  we  must 
make  remittance  in  this  cumbersome  manner,  by  shipping  gold? 
This  operation  we  are  seeing  now  is  exactly  the  same  as  was  done  a 
hundred  years  ago.  It  is  a  primitive  way  of  settling  debts,  and  yet, 
so  long  as  gold  maintains  its  pre-eminent  place  as  a  standard  of 
money,  it  must  ever  remain  the  only  way  of  settling  international 
balances  in  their  final  stage." 

164.    COMMERCIAL  CREDITS  IN  THE  FINANCING  OF 
IMPORTS  AND  EXPORTS^ 

Broadly  speaking,  commercial  credits  are  of  two  classes — those 
issued  to  facilitate  the  import  of  merchandise  and  those  issued  to 
facilitate  its  export.  Considering  the  question  from  the  standpoint 
of  New  York,  import  credits  are  so  much  more  important  than 
export  credits  and  issued  in  so  much  larger  volume,  they  will  be 
taken  up  first. 

Not  all  the  merchandise  imported  into  the  United  States  is  brought 
in  under  commercial  letters  of  credit,  but  that  is  coming  to  be  more 
and  more  the  way  in  which  payment  for  imports  is  being  arranged. 
Formerly  an  importer  who  had  bought  silk  or  white-goods  in  France 
went  around  to  his  banker,  bought  a  draft  on  Paris  for  the  required 
amount  of  francs  and  sent  that  over  in  payment.  In  some  cases  that 
is  still  the  method  by  which  payment  is  made,  but  in  the  very  great 

'  From  The  Wall  Street  Journal,  February  9,  191 2. 

» Adapted  from  Franklin  Escher,  Elements  of  Foreign  Exchange,  chap.  ix. 
The  Bankers  Publishing  Co.,  1910. 


56o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

majority  of  cases  where  business  is  being  run  on  an  up-to-date  basis, 
a  commercial  letter  of  credit  is  arranged  for  before  the  importation 
is  made.  Of  how  great  advantage  such  an  arrangement  is  to  the 
merchant  importing  goods  the  following  practical  illustration  of  how 
a  "credit"  works  will  show. 

To  exemplify  the  greatest  number  of  points  of  importance  possible 
in  connection  with  the  commercial  credit  business,  the  case  of  a 
shipment  of  raw  silk  from  China  will,  perhaps,  serve  best.  A  silk 
manufacturer  in  Paterson,  New  Jersey,  we  will  assume,  has  purchased 
by  cable  ten  bales  of  raw  silk  in  Canton,  China. 

The  purchase  of  the  silk  having  been  consummated  by  cable,  the 
first  thing  the  purchaser  would  do  would  be  to  go  to  his  banker  in 
New  York,  lay  before  him  an  exact  statement  of  the  conditions  under 
which  the  purchase  was  made,  and  get  him  (the  banker)  to  open  a 
commercial  letter  of  credit  covering  those  terms.  Such  a  credit,  of 
which  a  reprint  is  given  herewith,  would  be  in  the  form  of  a  letter  to 
the  issuing  banker's  London  correspondent,  requesting  him  to 
"accept"  the  drafts  of  the  sellers  of  the  silk  in  Canton  up  to  a  certain 
amount  and  under  certain  conditions.  These  conditions  are  all 
very  fully  set  forth  in  the  letter  of  credit  itself. 

The  silk  importer  having  received  this  letter  of  credit  from  the 
banker  in  New  York,  sends  it  by  first  mail  (or,  if  the  case  be  urgent, 
cables  its  contents)  to  the  seller  of  the  silk  out  in  Canton.  The 
latter,  having  received  it,  is  then  in  a  position  to  go  ahead  with  his 
shipment.  The  first  thing  he  does  is  to  put  the  silk  aboard  ship, 
receiving  from  the  steamship  company  a  receipt  (bill  of  lading) 
stating  that  the  ten  bales  have  been  put  aboard,  and  making  them 
deliverable  to  the  order  of  the  hanker  in  New  York,  who  issues  the  credit. 
The  bill  of  lading  being  made  out  to  his  order  is  useless  to  anybody 
else.  He  and  he  only  can  get  the  silk  out  of  the  ship  when  it  arrives 
in  New  York. 

The  shipper  in  Canton  having  received  this  bill  of  lading  from  the 
steamship  company  and  having  properly  insured  the  goods  and 
received  a  certificate  stating  that  he  has  done  so,  is  then  in  a  position 
to  go  ahead  and  draw  his  draft  for  the  cost  of  the  silk.  The  London 
correspondent  of  the  New  York  banker,  to  whom  the  letter  of  credit 
is  addressed,  is,  say,  the  Guaranty  Trust  Company,  London.  Upon 
that  institution  the  Canton  silk  firm,  therefore,  draws  his  draft  in 
pounds  sterling  for  the  cost  of  the  silk,  attaching  to  the  draft  the  bili 
of  lading,  an  invoice,  and  the  insurance  certificate. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        561 

A  pertinent  inquiry  at  this  point  is  as  to  why  the  letter  of  credit 
for  silk  shipped  from  a  city  in  China  directs  that  drafts  be  drawn  on 
London — as  to  why  London  figures  in  the  transaction  at  all  ?  The 
answer  is  that  drafts  on  London  are  always  readily  negotiable,  and 


Credit  No.  1301  {Copy) 

£600  Sterling 

GUARANTY  TRUST  COMPANY  OF  NEW  YORK 

New  York,  October  19,  1909 
To  the  Guaranty  Trust  Company, 

33  Lombard  Street,  London. 

Gentlemen:  At  the  request  and  for  account  of  The  Silk  Manu- 
facturing Co.,  Paterson,  we  hereby  authorize  Smith  &  Jones,  Canton, 
China,  or  any  other  parties  whose  drafts  you  may  be  directed  by 
their  written  order,  or  by  us,  to  accept  under  this  credit,  to  value  on 
you  at  4  months'  sight  for  any  sum  or  sums,  not  exceeding  in  all  Six 
hundred  Pounds   Sterling  (say  £600  Sterling)   to  be  used  as  they 

may  direct  for invoice  cost  of  10  bales  raw 

silk  to  be  purchased  for  account  of and  to  be 

shipped  to  a  Pacific  port  in  the  United  States 

The  Bills  must  be  drawn  in  Canton,  China,  prior  to  the  first  day 
of  June,  1910  and  advice  thereof  given  to  you  in  original  and  dupUcate, 
such  advice  to  be  accompanied  by  Bill  of  Lading  filled  up  to  order  of 
the  Guaranty  Trust  Company  of  New  York  (with  copy  of  invoice) 
for  the  property  shipped  as  above.  All  the  Bills  of  Lading  issued, 
except  one  sent  to  us  by  the  vessel  carrying  the  cargo,  and  one  retained 
by  the  captain  of  the  said  vessel,  are  to  be  forwarded  direct  to  you. 
Copy  of  invoice,  properly  certified  by  the  U.S.  Consul,  to  be  forwarded 
to  us  by  the  vessel,  also  advice  of  each  Bill  drawn. 

And  we  hereby  agree  with  the  drawers,  indorsers,  and  bona  fide 
holders  of  Bills  drawn  under  and  in  compliance  with  this  credit,  that 
the  same  shall  be  duly  honored  on  presentation  at  your  office  in  London. 

We  are,  Gentlemen, 

Your  obedient  servants. 
Guaranty  Trust  Company  of  New  York 

N.B.  Bills  drawn  under  this  credit  must  be  marked  Drawn 
under  Guaranty  Trust  Company  of  New  York 
Letter  of  Credit  No.  1301  dated  October  19,  1909 
for  £600 

Insurance  in  order  at  Canton 


Form  of  Commercial  Letter  of  Credit 

that  London  is  the  only  city  in  the  whole  world  drafts  on  which  are 
readily  negotiable  in  all  places  and  at  all  times. 

Assume  now  that  the  silk  has  been  put  aboard  ship  bound  for  the 
United  States,  that  the  shipper  has  drawn,  say,  a  draft  for  £1,000  at 
four  months'  sight  on  the  Guaranty  Trust  Co.,  London,  and  has 


562  MATERIALS  FOR  ELEMENTARY  ECONOMICS  ^ 

attached  thereto  the  bill  of  lading  and  the  insurance  certificate.  Tak- 
ing this  draft  around  to  his  bank  the  shipper  sells  it  for  local  currency 
at  the  then  prevailing  rate  for  four  months'  sight  drafts  drawn  on 
London.  The  fact  that  it  is  drawn  at  four  months'  sight  means 
that  he  will  get  a  lower  rate  of  exchange  for  it  than  if  it  were  drawn 
payable  on  demand,  but  that  was  the  arrangement  with  the  buyer 
in  New  York — that  the  drafts  against  the  silk  were  to  have  four 
months  to  run.    The  shipper  of  the  silk  is  now  out  of  the  transaction. 

Long  before  the  silk  gets  to  New  York  the  draft  will  have  reached 
London  and  will  have  been  presented  to  the  cashier  of  the  Guaranty 
Trust  Co.,  who,  of  course,  was  apprised  of  the  credit  opened  on  his 
bank  at  the  time  such  credit  was  originally  issued.  Examining  the 
draft  and  the  documents  carefully  to  see  that  they  conform  with  the* 
terms  of  the  credit,  the  cashier  of  the  Guaranty  Trust  Co.,  London, 
formally  "accepts"  the  draft,  marking  it  payable  four  months  from 
the  dale  it  was  presented  to  him.  The  accepted  draft  he  hands  back 
to  the  messenger  of  the  bank  who  brought  it  in;  the  bill  of  lading, 
insurance  certificate,  and  invoice  he  keeps.  By  the  next  mail  steamer 
he  dispatches  these  papers  to  the  banker  in  New  York  who  issued  the 
credit. 

For  the  time  being,  at  least,  that  is  to  say,  till  the  accepted  draft 
comes  due,  the  London  banker  is  out  of  the  transaction,  which  is 
now  narrowed  down  to  the  importer  of  the  silk  in  Paterson  and  the 
banker  in  New  York  who  issued  him  the  credit. 

Assume  now  that  a  week  has  passed  and  that  the  New  York  banker 
finds  himself  in  possession  of  a  bill  of  lading  for  ten  bales  of  silk,  mer- 
chandise deliverable  to  his  order.  A  few  days  later,  perhaps,  the 
goods  arrive  overland  by  fast  freight  from  Seattle.  The  Paterson 
silk  manufacturer,  who  is  eagerly  awaiting  their  arrival,  comes  around 
to  the  banker:  "Indorse  over  the  bill  of  lading  to  me,"  he  says, 
"so  that  I  can  get  the  silk  and  start  manufacturing  it." 

If  the  banker  does  it,  he  will  be  giving  over  the  only  security  he 
has  for  the  payment  at  maturity  of  the  draft  his  London  correspondent 
accepted,  and  for  which  he  himself  is  responsible.  Still,  the  manu- 
facturer has  to  have  his  silk. 

A  number  of  diflerent  agreements  exist  between  bankers  and 
importers  to  whom  the  bankers  issue  credits,  as  to  the  terms  on  which 
the  importers  are  to  be  allowed  to  take  possession  of  the  merchandise 
when  it  arrives  here.  Sometimes  the  goods  are  put  into  store  and 
handed  over  to  the  merchant  only  when  he  shows  that  he  has  sold  them 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        563 

and  needs  them  to  make  delivery.  Sometimes  they  are  warehoused 
at  once,  and  parceled  out  to  the  importer  only  in  small  lots,  as  he  needs 
them.  But  more  often  the  goods  are  delivered  over  to  the  importer  on 
his  signing  one  form  or  other  of  what  is  known  as  a  "trust  receipt." 
This  document  is  simply  a  pledge  on  the  part  of  the  importer  to  hold 
the  merchandise  in  trust  for  the  banker  and,  as  the  merchandise  is 
sold,  to  hand  over  the  proceeds  to  apply  against  the  draft  drawn  by 
the  shipper  of  the  goods.  The  theory  of  the  thing  is  that  by  the  time 
all  the  merchandise  has  been  sold  more  than  enough  money  will  have 
been  handed  over  to  the  New  York  banker  to  take  care  of  the  draft 
accepted  by  his  London  correspondent,  the  excess  constituting  the 
importer's  profit. 

The  kind  of  trust  receipt  under  which  bankers  are  willing  to  give 
over  the  merchandise  (the  only  collateral  they  have)  naturally  varies 
according  to  the  standing  of  the  house  in  question. 

Returning  now  to  the  particular  transaction  in  question,  the  point 
has  been  reached  where  the  silk  is  in  the  importer's  hands,  that  result 
having  been  accomplished  without  the  importer  having  put  up  a  cent 
of  money.  Moreover,  for  nearly  four  months  to  come  there  will  be 
no  necessity  of  the  importer's  putting  up  any  money  (unless  he  should 
sell  some  of  the  silk,  in  which  case  he  is  bound  to  turn  over  the  money 
to  the  New  York  banker  as  a  "prepayment").  But  in  the  ordinary 
course  of  events  the  importer  of  the  silk  has  nearly  the  four  full  months 
in  which  to  fabricate  the  goods  and  sell  them.  At  the  end  of  that 
time  the  draft  drawn  by  the  firm  in  Canton  and  accepted  by  the 
Guaranty  Trust  Co.,  London,  will  be  coming  due,  and  the  silk  importer 
will  be  under  the  necessity  of  remitting  funds  to  meet  it.  Twelve 
days  before  the  actual  maturity  of  the  £1,000  draft  in  London,  the 
New  York  banker  will  send  to  the  manufacturer  in  Paterson  a  mem- 
orandum for  £1,000  at,  say,  4.86  (whatever  is  the  current  rate) 
plus  commission.  The  silk  firm  pays  in  dollars;  the  New  York 
banker  uses  the  dollars  to  buy  a  demand  draft  for  £1,000;  a  day  or 
two  before  the  four  months'  sight  draft  comes  due  in  London  this 
demand  draft  ("cover")  is  received  in  London  from  New  York,  and 
the  whole  operation  is  closed. 

It  has  been  deemed  advisable  to  set  forth  the  whole  course  of  one 
of  these  import-financing  transactions,  in  order  that  each  successive 
step  may  be  clearly  understood.  The  question  of  just  why  this  credit 
business  is  worked  as  it  is  will  now  be  taken  up. 

The  whole  purpose  of  the  business,  it  is  plain  enough,  is  to  give 


S64  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  importer  here  a  chance  to  bring  in  goods  without  putting  up  any 
actual  money — in  other  words,  of  letting  him  use  a  larger  capital 
than  he  is  actually  possessed  of. 

What  does  the  seller  of  the  goods  get  out  of  it  ?  Payment  for  his 
goods  as  soon  as  he  is  ready  to  ship  them.  No  waiting  for  a  remit- 
tance, no  drawing  of  a  dollar-draft  on  an  obscure  firm  in  Paterson,N.J., 
which  no  Canton  bank  will  be  willing  to  buy  at  any  price.  From  the 
shipper's  standpoint,  surely  a  most  satisfactory  arrangement  and  one 
which  will  induce  him  to  quote  the  very  best  price  for  merchandise. 

As  to  the  banker's  part  in  the  transaction,  the  whole  question  is 
one  of  commission.  The  London  banker  on  whom  the  credit  is  issued 
gets  a  commission  from  the  American  banker  for  "accepting"  the 
drafts,  and  the  American  banker,  of  course,  gets  a  substantial  com- 
mission from  the  party  to  whom  the  credit  is  issued.  Sometimes  the 
banker  in  New  York  and  the  banker  in  London  work  on  joint-account, 
in  which  case  both  risk  and  commissions  are  equally  divided.  But 
more  often,  perhaps,  the  London  bank  gets  such-and-such  a  fixed 
commission  for  accepting  drafts  drawn  under  credits,  and  the  New 
York  banker  keeps  the  rest  of  what  he  makes  out  of  the  importer. 

It  is  well  to  note  the  fact  that  in  those  commercial  credit  trans- 
actions neither  banker  is  ever  under  the  necessity  of  putting  up  a  cent 
of  actual  money.  As  in  the  case  of  foreign  loans  previously  described, 
the  banker's  credit  and  the  banker's  credit  only  is  the  basis  of  the 
whole  operation.  The  London  bank  never  pays  out  any  actual  cash — 
it  merely  *' accepts"  a  four  months'  sight  draft,  knowing  that  before 
the  draft  comes  due  and  is  presented  at  its  wicket  for  payment,  "cover" 
will  have  been  provided  from  New  York.  The  New  York  banker, 
on  the  other  hand,  merely  sends  over  on  account  of  the  maturing 
draft  in  London  the  money  he  receives  from  the  importer.  He  is 
under  an  obligation  to  the  London  banker  to  see  that  the  whole 
£i,ooo  is  paid  off  before  the  four  months  are  over,  but  he  knows  the 
party  to  whom  he  issued  the  credit,  and  knows  that  before  that  time 
all  the  silk  will  have  been  manufactured  and  sold  and  the  proceeds 
turned  over  to  him.     At  no  time  is  he  out  of  any  actual  cash. 

For  purposes  of  illustration,  the  financing  of  the  import  of  silk 
from  China  was  chosen  because  the  operation  embodied  perhaps  more 
points  of  interest  in  connection  with  commercial  credit  business  than 
any  other  one  operation.  Commercial  credit  operations,  however, 
are  of  great  variety  and  scope.  They  may  involve,  for  instance,  the 
import  of  matting  shipped  from  Japan  on  slow  sailing  ships  and  where 
the  drafts  drawn  run  for  six  months  or  more,  or  they  may  involve  the 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        565 

import  of  dress  goods  from  France,  in  which  case  the  drafts  are  often 
at  sight.  Furthermore,  all  credits  are  by  no  means  issued  on  London. 
In  the  Far  East,  where  tea  or  shellac  or  silk  is  being  exported  to  the 
United  States,  London  is  known  as  the  one  great  commercial  and 
financial  center,  but  in  the  case  of  dress  goods  shipped  from  Marseilles 
or  Lyons,  for  instance,  the  credits  would  invariably  stipulate  that 
the  drafts  be  drawn  in  francs  on  Paris. 

But  whether  the  material  imported  be  dress  goods  from  France 
or  tea  from  China,  the  principle  of  the  commercial  credits  under  which 
the  goods  are  brought  in  remains  identically  the  same.  In  every  case 
there  is  a  buyer  on  this  end  who  wants  to  get  possession  of  the  goods 
without  having  to  put  up  any  money,  and  in  every  case  there  is  a 
seller  on  the  other  end  who  wants  to  receive  payment  as  soon  as  he 
lets  the  merchandise  get  out  of  his  hands.  The  banker  issuing  the 
credit  is  merely  the  intermediary,  and  the  naming  of  some  foreign 
point  on  which  the  drafts  are  to  be  drawn  is  merely  incidental  to  the 
conduct  of  the  operation. 

One  last  point  remains  to  be  cleared  up.  The  seller  of  the  goods 
in  the  silk-importing  operation  described  gets  actual  money  for  the 
goods  as  soon  as  he  ships  them — where  does  this  actual  money  come 
from?  In  the  last  analysis,  from  the  discount  market  in  London, 
from  the  man  in  London  who  discounts  the  draft  after  it  has  been 
"accepted."  The  exporter  in  Canton  gets  the  money  direct  from  his 
banker  in  Canton,  but  the  latter  is  willing  to  let  him  have  the  money 
in  exchange  for  the  draft  only  because  he  (the  banker)  knows  that  he 
can  send  the  draft  to  London  and  that  some  one  there  will  eagerly 
discount  it.  In  that  way  the  Canton  banker  gets  his  money  back. 
The  only  party  who  is  out  of  any  money  during  the  time  the  silk  is 
being  manufactured  and  sold  in  Paterson,  N.J.,  is  the  party  in  London 
who  has  discounted  the  shipper's  draft. 

The  real  function  of  the  banker,  then,  in  these  Commercial  Credit 
transactions,  is  to  open  up  the  international  loaning  market  to  the 
importer.  Through  the  system  now  in  force  this  is  accomplished  by  a 
banker  in  New  York  issuing  a  credit  and  by  a  banker  in  London  put- 
ting his  "acceptance"  on  drafts  drawn  under  that  credit.  The 
combination  makes  the  drafts  good;  makes  the  great  discount  market 
in  London  willing  to  take  them,  and  absorb  them,  and  advance  real 
money  on  them.  And  for  the  opening  up  of  this  great  reservoir  of 
capital  the  importer  here  has  to  pay  an  interest  rate  of  but  from  one 
to  two  per  cent  per  annum.  Naturally  the  business  has  grown  to 
tremendous  proportions. 


S66  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

165.    A  DOCUMENTARY  COMMERCIAL  LONG  BILL 


No.  167 

FIRST 

£500. 

New  York,  January 

19,  1911 

Sixty 

days  after  sight  of 

this  first  exchange  (second 

being  un- 

paid)  pay 

to  the  order  of  the  F  National  Bank  of  New  York  Five 

Hundred 

Pounds  Sterling. 

Value 

received.  Charge  to 

the  account  of 

(2500  bu.  wheat  by  s.s.  "Western") 

X 

To  Z  Bank 

London 

England 

X  has  sold  the  wheat  to  a  person  in  England  and  has  drawn  on  the 
bank  designated  by  the  buyer.  X  will  probably  attach  to  this  bill 
the  bill  of  lading  of  the  transportation  company,  the  insurance  cer- 
tificate of  the  insurance  company  and,  sometimes,  a  hypothecation 
slip  giving  the  purchaser  of  the  bill  of  exchange  a  right  to  the  goods 
shipped.  Probably  X  will  now  sell  the  bill  to  some  banker  at  the 
current  rate  of  exchange.  The  banker  will  send  it  to  his  correspond- 
ent in  England  who  will  present  it  for  "acceptance."  The  bill  may 
then  be  held  until  maturity  or  may  be  sold  in  the  open  market.  If 
this  bill  had  not  had  the  shipping  documents,  etc.,  attached  to  it,  it 
would  have  been  called  a  "clean  bill."  Clean  bills  are  obviously  not 
so  well  secured  as  documentary  bills.  The  changes  in  the  above  form 
which  would  be  necessary  to  make  it  a  "demand  bill,"  or  a  "bill 
drawn  against  securities,"  or  a  "banker's  demand  draft,"  or  a 
"banker's  long  draft"  are  obvious. 


166.    THE  PAR  OF  EXCHANGE  AND  APPROXIMATE  GOLD 

POINTS 

London 


Name  of  Center 

Par 

Gold-importing 
Point 

Gold-exporting 
Point 

Berlin 

20.43' 
12.107'' 
4.866« 
25.225'' 

20.53 

12.17 

4.88 

25-34 

2».32 

Amsterdam 

12.02 

New  York 

4.84 

Paris 

25. I2i 

•Marks  per  pound  sterling 
^Florins  per  pound  sterling 


•  Dollars  per  pound  sterling 
'Francs  per  pound  sterling 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        567 

Pams 


London 

25.225'* 
1 23. 46* 
518.26' 
208.32' 

25.12^ 
122.90 

515-75 
207.16 

25-34 
124. 14 

Berlin 

New  York 

523-05 
210. 16 

Amsterdam 

New  York 

London 

4. 8660 
5.182'' 
95-28* 

4.84 

S-23 

94  50 

4.88 

S-i6 
96.25 

Berlin 

London 

20.43* 
81.00'' 
419.79' 
168.74" 

20.33 
80.5!^ 

415-25 
168.25 

20.53 

81.37 

423.30 

170.50 

Paris 

New  York 

Amsterdam 

•Marks  per  pound  sterling 
•Dollars  per  pound  sterling 
<*  Francs  per  pound  sterling 
•  Francs  per  hundred  marks 
'  Francs  per  hundred  dollars 
«  Francs  per  hundred  florins 

i"  Francs  per  dollar 
'  Cents  per  four  marks 

*  Marks  per  hundred  francs 
'  Marks  per  hundred  dollars 

">  Marks  per  hundred  florins 

167.     FOREIGN  EXCHANGE  TRANSACTIONS' 

Among  the  various  transactions  which  may  properly  be  termed 
foreign  exchange  are  the  following:  the  issuing  of  a  money  order, 
draft,  check,  or  bill  of  exchange  payable  in  a  foreign  country;  the 
shipping  of  currency  or  coin  from  one  country  to  another;  an  order, 
either  written  or  cabled  (telegraphed),  to  have  a  certain  sum  of  money 
paid  in  a  foreign  country;  a  draft  payable  in  a  foreign  country  drawn 
for  the  value  of  goods  exported;  a  draft,  money  order,  check,  or  bill 
of  exchange  drawn  in  a  foreign  country  payable  in  this  country; 
the  buying  or  selling  of  foreign  currency  or  coin,  whether  here  or 
abroad;  a  circular  letter  of  credit,  commercial  or  mercantile  letter  of 
credit,  circular  note,  travelers'  cheque,  or  other  forms  used  either 
for  obtaining  money  or  credit  in  a  foreign  country. 


'  From  Howard  K.  Brooks,  Foreign  Exchange  Text  Book,  pp.  1-2.    The  Author, 


1906. 


$68  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

1 68.     FOREIGN  EXCHANGE  QUOTATIONS' 

Quotations  on  foreign  exchange,  as  they  appear  in  the  financial 
columns  of  our  leading  daily  newspapers  and  in  weekly  financial 
publications,  are  seldom  understood  except  by  those  very  familiar 
with  the  business.  Although  almost  every  newspaper  has  a  different 
way  of  quoting  the  rates,  some  more  complete  than  others,  the  follow- 
ing, which  is  a  facsimile  of  a  clipping  from  a  daily  paper,  is  given  for 
illustration  and  explanation  by  reason  of  its  completeness: 

Foreign  Exchange 

Sterling  was  firm  with  bankers'  6o-day  bills  quoted  at  J  of  a  cent, 
cheques  5,  and  cables  10  points  above  Friday's  close.  Rates  for  actual 
business  follow : 

Bankers',  60  days 4.84I  ©4.845 

Bankers',  sight 'S 4.869S@4.87 

Cable  transfers 4.8735@4.8740 

Documents  for  payment 4-  84I  ©4. 84I 

Ninety  days  on  bankers 4. 82^  @4. 82I 

Commercial  sight 4. 868s@4. 8690 

Continentals  were  less  active,  virtually  unchanged.  Bankers'  sight 
francs  closed  at  5.i6|@s.i6j  plus  ^;  marks,  gsf  less  A  @95l; 
guilders,  405  less  ■3'T@4of. 

Following  were  the  posted  rates  of  the  leading  drawers  of  foreign 
exchange: 

Sterling 4-88 

Paris,  francs 5.15 

Berlin,  reichsmarks 9SJ 

Amsterdam,  florins 4°! 

Antwerp,  francs S  •  ^  Sl 

Genoa,  lire 5  •  i  Sl 

Zurich,  francs S- 15! 

Vienna,  kronen 20. 40 

Stockholm,  kronors 26 .  90 

St.  Petersburg,  rubles Si  •  7° 

"Firm"  means  a  good  demand  with  prices  tending  upward. 

"Steady"  would  mean  a  fair  demand  with  prices  likely  to  remain 
stationary. 

"Strong"  would  mean  a  large  demand  with  prices  certain  to  go 
higher. 

•From  Howard  K.  Brooks,  Foreign  Exchange  Text  Book,  pp.  1 16-19.  The 
Author,  1906. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE         569 

"Dull  or  weak"  would  mean  very  little  or  no  demand  with  prices 
tending  lower. 

"Bankers'  60  days":  This  quotation  is  for  bankers'  drafts 
drawn  in  pounds  sterling  upon  (or  payable  by)  a  bank  in  London, 
60  days  after  sight  or  after  acceptance  by  the  paying  bank.  The 
rates  4 .  84I  to  4 .  845  mean  per  pound  sterling. 

"Bankers'  sight":  A  bankers'  draft  for  a  sum  in  pounds  sterling 
upon  a  bank  in  London,  payable  at  sight  or  upon  demand.  The 
rates  $4.8695  to  $4.87  mean  per  pound  sterling. 

"Cable  transfers":  Where  the  money  (pound  sterling)  is  paid 
abroad  (London)  upon  an  order  sent  by  cable.  The  amount  would 
be  paid  in  London  immediately  upon  receipt  of  cable  instructions, 
usually  within  a  few  hours. 

"Documents  for  payment":  This  refers  to  commercial  bills  of 
exchange  with  documents  (bill  of  lading  and  insurance  certificate 
attached  to  draft),  drawn  against  an  export  shipment,  the  words 
"for  payment"  meaning  that  the  draft  must  be  paid  before  documents 
are  given  up,  thus  insuring  payment  before  delivery  of  goods.  If 
"documents"  were  for  acceptance  the  documents  would  be  delivered 
when  draft  was  accepted  by  person  upon  whom  drawn  (called 
"drawee"),  thus  enabling  drawee  to  obtain  goods  before  payment 
of  draft.  This  quotation  refers  to  drafts  drawn  in  pounds  sterling, 
drawn  payable  60  days  after  sight  (acceptance).  The  rates  quoted 
are  per  pound  sterling. 

"Ninety  days  on  bankers":  Means  drafts  drawn  by  either  banks 
or  merchants  (exporters)  in  pounds  sterling  upon  (payable  by)  a 
bank,  90  days  after  the  draft  is  accepted  by  bank  upon  which  drawn. 

"Commercial  sight":  Drafts  drawn  by  merchants  (exporters) 
payable  at  sight  against  balances  in  a  bank  abroad  which  may  have 
accumulated  through  sale  of  merchandise  exported. 

"Continentals  were  less  active,  virtually  unchanged":  This 
refers  to  bills  of  exchange  and  drafts  upon  cities  or  countries  of 
Europe,  other  than  Great  Britain. 

"Bankers'  sight  francs":  This  refers  to  drafts  drawn  by  bankers 
in  money  of  France  (francs)  payable  by  a  bank,  presumably  at 
Paris.  The  quotation  5.165  to  5.165  plus  ^  is  for  francs  per 
$1 .00.  The  quotations  for  marks  are  for  4  marks  on  Germany,  and 
those  for  guilders  are  on  Holland,  per  guilder  or  gulden,  or  florin. 

"Posted  rates":  The  quotations  given  as  posted  rates  mean 
rates  at  which  leading  sellers  of  exchange  were  selling  over  their 


S70  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

counter  to  customers,  while  the  preceding  rates  in  the  above  clipping 
refer  to  rates  at  which  bankers  bought  the  exchange,  or  in  other 
words,  "buying  rates." 

"Sterling":  This  quotation  is  for  sight  drafts  drawn  in  the 
money  of  England,  pounds  sterling. 

"Paris,  francs":  Drafts  or  checks  drawn  in  French  francs 
payable  only  at  Paris.    The  rate  is  per  $i  .00. 

"Berlin,  reichsmarks,  demand":  A  draft  drawn  payable  at 
Berlin,  Germany,  in  marks.     The  rate  is  for  4  marks. 

"Amsterdam,  florins":  Demand  checks  or  drafts  on  Amsterdam, 
Holland,  drawn  in  money  of  Holland,  florins  or  guilders  (or  gulden) 
(different  nomenclature  of  same  money).    The  rate  is  per  gulden. 

"Antwerp,  francs":  This  is  a  quotation  for  5  francs  15!  centimes 
per  $1.00  for  demand  drafts  drawn  payable  at  Antwerp,  Belgium. 
This  country  has  the  same  monetary  system  as  France,  with  coins 
of  same  name. 

"Genoa,  lire":  This  quotation  means  that  for  a  demand  check 
or  draft  on  Genoa,  Italy,  you  would  have  to  pay  at  rate  of  5  lire 
15!  centesimi  per  $1 .00. 

"Zurich,  francs":  For  demand  checks  and  drafts  payable  at 
Zurich,  Switzerland,  you  would  be  allowed  5  francs  15I  centimes  for 
each  $1 .00. 

"Vienna,  kronen":  For  demand  checks  or  drafts  on  Vienna, 
Austria.  The  rate  quoted  is  20.40  [cents]  per  krone,  the  money  of 
Austria. 

"Stockholm,  kronors":  For  demand  checks  and  drafts  on  Stock- 
holm, Sweden.  The  rate  is  26.90  cents  per  kroner,  the  money  of 
Norway,  Sweden,  and  Denmark. 

"St.  Petersburg,  rubles":  For  demand  checks  and  drafts  on 
St.  Petersburg,  Russia.  The  rate  is  51 .  70  cents  per  r-uble,  the  money 
of  Russia. 

169.    THE  FOREIGN  EXCHANGE  MARKET' 

The  foreign  exchange  market  is  in  every  sense  "open" — anyone 
with  bills  to  buy  or  sell  and  whose  credit  is  all  right  can  enter  it  and 
do  business  on  a  par  with  anyone  else.  There  is  no  place  where  the 
trading  is  done,  no  membership,  Ucense,  or  anything  of  the  kind.    The 

'  Adapted  from  Franklin  Escher,  Elements  of  Foreign  Exchange,  chaps,  ii, 
iii,  and  v.    The  Bankers  Publishing  Co.,  igio. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        571 

"market,"  in  fact,  exists  in  name  only;  it  is  really  constituted  of  a 
number  of  banks,  dealers,  and  brokers,  with  offices  in  the  same  section 
of  the  city,  and  who  do  business  indiscriminately  among  themselves — 
sometimes  personally,  sometimes  by  telephone,  by  messenger,  or  by 
the  aid  of  the  continuously  circulating  exchange  brokers. 

The  system  is  about  as  follows:  The  larger  banks  and  banking 
houses  have  a  foreign  exchange  manager,  or  partner,  taking  care  of 
that  part  of  the  business,  whose  office  is  usually  so  situated  as  to 
make  him  accessible  to  the  brokers  who  come  in  from  the  outside, 
and  whose  telephoning  and  wiring  facilities  are  very  complete.  These 
larger  houses  have  no  brokers  or  "outside"  men  in  their  employ. 
The  manager  knows  very  well  that  plenty  of  chance  to  do  business, 
buying  or  selling,  will  be  brought  in  to  him  by  the  brokers  and  that 
his  wires  keep  him  constantly  in  touch  with  his  fellow  bankers. 

Next  come  the  big  dealers  in  exchange,  some  of  whom  do  a  regular 
exchange  business  of  their  own,  the  same  as  the  bankers,  but  who  also 
have  men  out  on  the  street  "trading"  between  large  buyers  and  sellers 
of  bills.  Such  houses  are  necessarily  closely  in  touch  with  banks, 
bankers,  exporters,  and  importers  all  over  the  country,  and  have 
always  large  orders  on  hand  to  buy  and  sell  exchange.  Some  of  the 
bills  they  handle  they  buy  and  use  for  the  conduct  of  their  own  busi- 
ness with  banks  abroad,  but  the  more  important  part  of  what  they 
do  is  to  deal  in  foreign  exchange  among  the  banks.  They  are  known 
as  always  having  on  hand  for  sale  large  lines  of  commercial  and 
bankers'  bills,  while  on  the  other  hand  they  are  always  ready  to 
buy,  at  the  right  price. 

After  this  class  of  houses  come  the  regular  brokers — the  independ- 
ent and  unattached  individuals  who  spend  their  time  trying  to  bring 
buyer  and  seller  together,  and  make  a  commission  out  of  doing  it. 
In  a  market  like  New  York  the  number  of  exchange  brokers  is  very 
large.  Like  bond-brokerage,  the  business  requires  little  in  the  way 
of  office  facilities  or  capital,  and  is  attractive  to  a  good  many  persons 
who  are  willing  to  accept  the  small  income  to  be  made  out  of  it  in 
return  for  being  in  a  business  where  they  are  independent. 

There  being  no  regular  market  in  which  foreign  exchange  rates 
are  made,  it  follows  that  the  establishment  of  rates  each  morning  and 
during  the  course  of  each  day  will  be  according  to  the  supply  and 
demand  for  bills.  Rates  are  constantly,  changing,  and  changing  at 
times  almost  from  minute  to  minute.  Yet  so  complete  is  the  system 
of  telephones  and  brokers  that  any  exchange  manager  can  tell  just 
about  what  is  taking  place  in  any  other  part  of  the  market.    As  to 


572  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  actual  fluctuation  of  exchange,  while  it  is  true  that  rates  at  times 
rise  and  fall  with  all  the  violence  so  often  displayed  in  the  security 
markets,  most  of  the  time  they  move  within  a  comparatively  narrow 
range.  On  an  ordinary  business  day,  for  instance,  the  change  is  not 
apt  to  run  over  fifteen  points  (15-100  of  a  cent  per  pound). 

As  to  the  relative  importance  of  the  different  kinds  of  exchange, 
sterling,  of  course,  occupies  the  most  prominent  position.  What 
proportion  of  the  total  of  exchange  dealt  in  in  the  New  York  market 
consists  of  sterling  it  is  impossible  to  determine,  but  that  it  is  as  great 
as  the  volume  of  all  the  other  kinds  of  exchange  put  together  can 
safely  be  said.  Many  big  dealers,  indeed,  make  a  specialty  of  sterling, 
and  if  they  handle  any  other  bills  at  all,  do  so  only  on  a  very  small 
scale.  As  to  whether  francs  or  marks  come  next  in  volume,  there  is  a 
difference  of  opinion.  These  are  the  three  great  classes  of  exchange 
and  are  the  basis  of  at  least  nine-tenths  of  all  foreign  exchange  opera- 
tions. 

Turning  now  to  consideration  of  the  various  sources  from  which 
springs  the  demand  for  foreign  exchange,  it  appears  that  they  can  be 
divided  about  as  follows: 

1.  The  need  for  exchange  with  which  to  pay  for  imports  of  mer- 
chandise. 

2.  The  need  for  exchange  with  which  to  pay  for  securities  (Ameri- 
can or  foreign)  purchased  by  us  in  Europe. 

3.  The  necessity  of  remitting  abroad  the  interest  and  dividends 
on  the  huge  sums  of  foreign  capital  invested  here. 

4.  The  necessity  of  remitting  abroad  freight  and  insurance  money 
earned  here  by  foreign  companies. 

5.  Money  to  cover  American  tourists'  disbursements  and  expenses 
of  wealthy  Americans  living  abroad. 

6.  The  need  for  exchange  with  which  to  pay  off  maturing  foreign 
short-loans    and    finance-bills. 

7.  Coming  to  maturity  of  issues  of  American  bonds  held  abroad. 
Where  some  especially  large  issue  runs  off  without  being  funded 
with  new  bonds,  demand  for  exchange  often  becomes  very  strong. 
Especially  is  this  the  case  with  the  short-term  issues  of  the  railroads 
and  most  especially  with  New  York  City  revenue  warrants  which  have 
become  so  exceedingly  popular  a  form  of  investment  among  the 
foreign  bankers. 

8.  Low  money  rates  here,  which  result  in  a  demand  for  exchange 
with  which  to  send  banking  capital  out  of  the  country. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        573 

9.  High  money  rates  at  some  foreign  center  which  create  a  great 
demand  for  exchange  drawn  on  that  center. 

The  causes  which  make  up  for  low  rates  must  necessarily  be,  to  a 
certain  extent,  merely  the  converse,  but  for  the  sake  of  clearness  they 
are  set  down.    The  division  is  about  as  follows: 

1.  Especially  heavy  exports  of  merchandise.  Exports  continue 
on  a  certain  scale  all  through  the  year,  but  are  heavier  at  some  times 
than  others. 

From  the  middle  of  August,  when  the  first  of  the  new  cotton  crop 
begins  to  find  its  way  to  the  seaport,  until  the  middle  of  December, 
when  the  bulk  of  the  corn  and  wheat  crop  exports  have  been  completed, 
exchange  in  very  great  volume  finds  its  way  into  the  New  York  market. 
Normally  this  is  the  season  of  low  rates. 

2.  Large  purchases  of  our  stocks  by  the  foreigners  and  the  placing 
abroad  of  blocks  of  American  bonds. 

3.  Distrust  on  our  part  of  financial  conditions  existing  at  some 
point  abroad  where  there  are  carried  large  deposits  of  American 
capital.  In  the  everyday  life  of  the  exchange  market,  political 
development  of  an  unfavorable  character  and  war  rumors  are  about 
the  most  frequent  and  potent  influences  toward  the  condition  of 
uneasiness  above  referred  to.  Few  war  rumors  ever  come  to  anything, 
but  there  are  times  when  they  circulate  with  astonishing  frequency 
and  persistence  and  cause  decided  uneasiness  concerning  financial 
conditions  at  important  points.  At  such  times  bankers  having  money 
on  deposit  at  those  points  are  apt  to  become  influenced  by  the  drift 
of  sentiment  and  to  draw  down  their  balances.  Here,  again,  opera- 
tors in  exchange,  keenly  on  the  alert  for  such  chances,  will  very  likely 
begin  to  sell  the  exchange  market  short  and  often  succeed  in  breaking 
it  to  a  degree  entirely  unwarranted  by  the  known  facts. 

4.  High  money  rates  here. 

5.  Unprofitably  low  loaning  rates  at  some  important  foreign  center 
where  American  bankers  ordinarily  carry  large  balances  on  deposit. 

These  are  the  main  influences  bearing  on  the  fluctuation  of 
exchange.  Needless  to  say  they  are  not  exerted  all  one  way,  or  one 
at  a  time,  as  set  forth.  The  international  money  markets  are  a  most 
decidedly  complex  proposition,  and  there  is  Hterally  never  a  time 
when  several  influences  tending  to  put  rates  up  are  not  conflicting 
with  several  influences  tending  to  put  rates  down.  The  actual 
movement  of  the  rate  represents  the  relative  strength  of  the  two  sets 
of  influences. 


574  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

170.    FACTORS  AFFECTING  THE  RATES  OF  FOREIGN 

EXCHANGE 

The  fluctuations  in  sterling  exchange  last  week'  were  not  impor- 
tant, but  such  changes  as  actually  occurred  were  dominated  mainly 
by  the  course  of  the  international  money  markets.  There  has  been 
a  decided  easing-up  in  nearly  all  of  the  world's  leading  financial 
centers,  the  March  quarterly  settlements  having  been  completed 
without  the  acute  disturbances  that  were  feared  only  a  short  time 
ago.  The  European  poHtical  situation  has  also  been  cleared  to  a 
considerable  extent,  although  the  defiance  of  the  wishes  of  the  powers 
by  Montenegro  militates  against  a  complete  restoration  of  confidence. 
The  position  of  the  European  banks  last  week  was  watched  with 
more  active  interest  than  on  any  previous  occasion  for  quite  a  while. 
The  strain  upon  their  resources  for  the  March  quarterly  settlements 
was  very  severe,  but  they  came  out  of  it  with  better  results  than  were 
anticipated. 

The  Bank  of  England,  which,  after  all,  is  the  great  leader  of 
European  finance,  did  extremely  well  under  the  circumstances. 
While  it  lost  $5,000,000  in  total  reserve  and  $1,200,000  in  bullion,  it 
was  enabled  to  decrease  loans  $24,700,000  and  thereby  raise  its 
percentage  of  reserve  to  41 .85,  which  is  over  2  per  cent  better  than 
in  either  1912  or  1911.  The  Bank  of  France  made  an  actual  gain 
in  gold  of  $2,133,000,  but,  in  order  to  tide  over  the  settlements,  had 
to  expand  its  note  circulation  $51,990,000  and  its  loans  $31,745,000. 
The  Bank  of  Germany  was  under  greater  pressure  than  any  of  the 
other  big  institutions.  The  bank  suffered  a  decrease  in  its  stock  of 
gold  and  silver  of  $15,994,000  and  increased  its  note  circulation  in 
the  enormous  sum  of  $136,121,000  and  its  discounts  $121,018,000. 
But  poor  as  this  showing  was,  it  was  better  than  expected,  as  the 
aggregate  depreciation  in  its  status  was  $20,750,000  less  than  in  191 2. 
Paris  discounts  remained  at  4  per  cent,  but,  as  compared  with  a 
period  just  prior  to  the  settlements,  Berlin  rates  declined  from  6  to 
4I  per  cent  and  English  rates  from  4I  per  cent  to  4!  per  cent.  These 
figures  reflect  in  a  striking  way  the  easing-up  in  discounts  abroad. 
There  was  some  talk  during  the  week  about  the  Bank  of  England 
reducing  its  minimum  rate,  but  it  is  highly  probable  that  no  such 
action  will  be  taken  until  it  is  demonstrated  that  the  German  money 
markets  are  going  to  remain  on  an  easier  basis  and  also  until  the 
political  atmosphere  becomes  still  clearer. 

'  From  The  Journal  of  Commerce  and  Commercial  Bulletin,  April  7,  1913. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        575 

As  is  well  known,  there  is  a  great  congestion  of  securities  at 
London,  with  constant  solicitations  for  more  capital,  and  this  may 
assist  in  keeping  the  bank  rate  where  it  is  for  some  time.  What 
throws  strong  light  upon  the  congestion  of  securities  at  London  was 
the  announcement  on  Saturday  that  only  6  per  cent  of  the  South 
African  $20,000,000  loan  was  subscribed  for,  the  large  balance  being 
left  on  the  hands  of  the  syndicate.  The  situation  abroad  of  course 
caused  a  relaxation  in  the  previous  demand  for  exchange,  particularly 
for  cable  transfers,  and  the  market  eased  off  to  4.87  for  demand  and 
4 .  8755  for  cables,  but  soon  rallied  to  4 .  8720  and  4 .  8870,  respectively. 
The  rally,  however,  was  not  maintained.  The  recovery  was  due  to 
the  pronounced  relaxation  in  money  in  the  local  market,  where  the 
renewals  for  call  loans  fell  to  3!  per  cent  and  quotations  for  all  maturi- 
ties to  42  @4f  per  cent.  So  it  will  be  seen  that  the  easing-up  in  money 
here  and  abroad  worked  somewhat  at  cross-purposes. 

Aside  from  the  increased  ease  in  money  here,  exchange  was  pre- 
vented from  suffering  any  material  decline  through  the  continued 
scarcity  of  commercial  bills.  One  important  reason  for  the  small 
supply  of  commercial  exchange  was  the  decreased  exports  of  cotton 
from  the  United  States.  From  the  opening  of  the  cotton  year  to 
the  present  time  exports  of  the  southern  staple  show  a  decrease  of 
2,000,000  bales.  As  cotton  is  always  relied  upon  to  furnish  a  large 
volume  of  exchange  for  the  country  to  liquidate  its  foreign  indebted- 
ness and  pile  up  a  credit  balance,  it  will  be  evident  to  all  that  this  loss 
of  2,000,000  bales  of  cotton  is  a  very  significant  matter.  But  the 
fact  should  not  be  lost  sight  of  that  there  is  still  a  considerable  amount 
of  cotton  held  in  the  South,  and  also  that,  with  the  easing-up  in  money 
abroad  and  the  settlement  of  the  Balkan  question,  exports  are  likely 
to  increase  in  the  future.  Last  week  it  became  apparent  that  both 
English  and  Continental  spinners  were  drawing  freely  upon  accumu- 
lated supplies,  and  that  stocks  were  being  steadily  reduced.  These 
therefore  must  be  replenished,  and  easier  money  will  greatly  facilitate 
replenishment.  Grain  is  also  likely  to  furnish  an  increased  volume 
of  exchange  in  the  future.  Farm  reserves  are  unusually  large; 
hence  there  will  be  a  liberal  amount  of  wheat,  corn,  and  other  cereals 
for  shipment.  Exports  already  are  showing  an  increase.  The  outgo 
of  wheat  last  week  reached  4,000,000  bushels,  an  increase  of  3,000,000 
bushels  over  the  preceding  week,  while  that  of  corn  rose  to  nearly 
2,000,000  bushels,  a  gain  of  over  400,000  bushels.  The  opening  of 
navigation  will  release  a  large  amount  of  grain,  which  will  be  available 
for  export. 


576  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Closing  rates  were  as  follows: 

London — Bankers'  60  days 4.8325@4.835o 

Demand  sterling 4.87o5@4.87io 

Cable  transfers 4 .  876o@4 .8765 

Demand,  N.Y.,  in  London 4.88j  ©4. 88 A 


A  decline  of  30  to  35  points  occurred  in  sterling  exchange  yester- 
day,* when  demand  bills  sold  as  low  as  4 .  8660,  while  cable  transfers 
dropped  to  4.8705.  These  are  the  lowest  figures  so  far  touched  on 
the  current  downward  movement. 

Among  the  circumstances  that  contributed  to  this  end  were 
easier  English  discounts  and  continued  buying  of  stocks  in  this  market 
by  the  foreigners,  as  well  as  the  placing  abroad  of  a  portion  of  recent 
bond  issues.  The  supply  of  bills  consequently  was  larger  than  of 
late.  Now  that  the  fortnightly  settlement  at  London  is  out  of  the 
way  the  diflference  between  demand  bills  and  cable  transfers  is  less 
marked  than  hitherto. 

Final  quotations  for  actual  business  were  as  follows:  bankers' 
60  days,  4.8305  ©4.8315;  bankers'  sight,  4.8660  @ 4. 8665;  cable 
transfers,  4.8705  @4. 8710;  commercial  60  days,  4.83;  commercial 
90  days,  4.81^. 

The  movements  in  sterling  exchange  last  week*  were  more  important 
than  for  some  time,  demand  bills  ha\dng  risen  close  to  4.87  and  cable 
transfers  to  4.87!,  the  highest  quotations  in  months.  Underlying 
this  sharp  advance  were  several  influences  of  moment.  In  the  first 
place  open  market  discounts  at  London  advanced  to  4I  per  cent  on 
the  spot,  while  the  rate  to  arrive  was  4^  per  cent,  the  oflicial  bank 
rate.  The  Bank  of  England  showed  the  highest  percentage  of  reserve 
in  a  series  of  years,  but  the  bullion  account  was  $15,000,000  below 
that  of  last  year.  Naturally  under  existing  conditions  no  reduction 
was  made  in  the  rate.  The  difficulty  of  the  English  money  market 
centered  in  the  fact  that  Germany  was  not  only  a  borrower  in  London, 
but  took  a  round  amount  of  gold  in  the  open  market,  and  also  some 
German  coin  from  the  Bank  of  England.  In  addition,  there  were 
new  demands  for  capital  and  considerable  pressure  from  syndicates 
loaded  with  undigested  securities.     Firm  money  and  discount  rates 

'  From  The  Journal  of  Commerce  and  Commercial  Bulletin,  April  1 2,  1913. 
*  From  The  Journal  of  Commerce  and  Commercial  Bulletin,  June  9,  1913. 


INTERNATIONAL  TRADE  AND  FOREIGN  EXCHANGE        577 

prevail  all  over  Europe,  as  there  are  still  many  big  loans  pending, 
the  latest  one  in  point  being  an  effort  on  the  part  of  Belgium  to  borrow 
over  $100,000,000  in  Paris. 

During  the  past  week  there  was  a  fair  demand  to  remit  June 
interest  and  dividend  money  to  Europe,  and  tourists'  letters  of 
credit  again  figured  as  a  strengthening  force.  There  were  also  the 
usual  home  returning  immigrants,  who  in  the  aggregate  take  out  a 
large  amount  of  money  in  the  course  of  the  season.  On  the  othei 
hand,  there  was  a  reduction  in  the  supply  of  commercial  exchange, 
such  as  usually  sets  in  about  this  time,  when  exports  are  on  the 
wane.  Last  week  exports  of  produce  and  merchandise  from  New 
York  alone  decreased  $5,300,000,  which,  under  the  present  conditions 
in  the  exchange  market,  was  quite  an  important  circumstance.  Then 
the  unsettled  condition  of  the  European  security  markets  caused 
seUing  of  stocks  to  New  York  to  the  extent  of  about  90,000  shares, 
which  in  itself  was  a  matter  of  no  mean  importance.  The  sharp 
advance  in  time  money  rates  here,  with  normal  conditions  abroad, 
would  have  led  up  to  heavy  lending  of  foreign  capital  and  the  conse- 
quent drawing  of  finance  bills.  But  Europe  has  such  financial 
troubles  of  its  own  at  present  that  there  was  practically  nothing 
doing  in  the  way  of  placing  capital  in  this  market. 

The  high  range  of  exchange  quotations  brought  about  an  export 
of  $200,000  gold  to  Antwerp.  This  at  once  raises  discussion  as  to 
the  possibility  of  the  resumption  of  shipments  to  Paris.  As  the 
situation  stands  the  Bank  of  France  could  secure  gold  now  cheaper 
than  it  did  before,  if  it  renewed  former  special  inducements. 

Closing  rates  were  as  follows: 

London— Bankers'  60  days 4. 8285@4. 8295 

Demand  Sterling 4 .8675@4 .  8680 

Cable  transfers 4. 8710®  4- 8715 

Grain  bills,  7  days 4  •  ^sl 

Grain  bills,  60  days 4-  83^  @  4-  83! 

Commercial,  sight 4-  86^ 

Demand,  New  York  in  London 4- 87! @  4-  87A 


XIII.    TARIFF  POLICY 

171.    A  SUMMARY  OF  THE  TARIFF  HISTORY  OF  THE 

UNITED  STATES 

The  first  period,  lySg-iSi^:  A  tar  if  for  revenue. — One  of  the  chief 
causes  leading  to  the  adoption  of  our  Constitution  was  the  necessity 
of  giving  the  federal  government  power  to  levy  taxes  and  regulate 
foreign  commerce.  As  the  people  of  the  country  were  very  much 
opposed  to  taxation  the  easiest  way  to  secure  revenue  was  through  the 
indirect  method  of  customs  duties.  It  was  but  natural,  therefore, 
that  the  first  act  of  Congress  imder  the  new  Constitution  should  be  the 
tariJBf  of  1789.  Specific  duties  were  levied  on  about  thirty  commodi- 
ties, ad  valorem  rates  of  7^  to  15  per  cent  were  imposed  on  certain 
other  articles,  and  5  per  cent  on  all  articles  not  elsewhere  specified. 
The  average  rate  of  duty  was  8^  per  cent.  Among  the  important 
duties  were  those  on  molasses,  sugar,  tea,  coffee,  wines  and  spirits, 
hemp,  cordage,  boots,  leather,  earthenware,  glass,  nails,  iron,  steel,  and 
salt.  The  main  purpose,  as  was  to  be  expected,  was  revenue  rather 
than  protection  and  this  is  reflected  in  the  act  by  the  low  rates  of 
duty  and  the  inclusion  of  such  articles  as  sugar,  coffee,  tea,  and  wines, 
which  nobody  expected  would  be  extensively  produced  in  this  country. 

During  the  next  quarter-century  the  rates  on  various  commodities 
were  raised  from  time  to  time,  but  in  nearly  every  case  the  immediate 
and  most  important  cause  was  the  need  for  more  revenue,  and  such 
protection  as  was  given  was  largely  incidental.  This  continued 
through  the  War  of  181 2,  at  the  opening  of  which  duties  were  doubled, 
thus  raising  the  rate  on  many  commodities  to  about  35  per  cent. 
During  most  of  this  period,  moreover,  agriculture  and  foreign  com- 
merce were  particularly  profitable  and  there  was  little  incentive  to 
enter  upon  new  lines  of  manufacturing.  The  restrictions  upon  foreign 
commerce  beginning  with  the  orders  and  decrees  of  England  and 
France  and  our  own  Embargo  continued  through  the  War  of  181 2  and 
soon  completely  changed  the  whole  situation.  The  supply  of  foreign 
manufactures  being  so  completely  cut  off,  the  country  was  thrown  back 
upon  its  own  resources  and  forced  to  start  in  manufacturing  for  itself. 
Under  this  protection  and  stimulus  a  great  variety  of  manufactures 
sprang  up,  many  of  the  concerns  being  very  inadequately  equipped 
and  managed.    Then,  when  th^  close  of  the  war  in  1815  let  in  a  flood 

S7« 


TARIFF  POLICY  579 

of  foreign  goods,  a  large  portion  of  which  sold  at  unusually  low  prices, 
the  domestic  manufacturer  found  himself  in  difficulties  and  at  once 
sought  protection  through  the  tariff. 

The  second  period,  1816-1860:  A  low  protective  tariff. — As  a  result 
the  country  now  entered  upon  a  new  period  in  its  tariff  history. 
Protection  rather  than  revenue  became  the  main  objective  and  in 
consequence  there  was  a  distinct  change  both  in  the  kind  of  commodi- 
ties protected  and  in  the  construction  of  the  tariff  duties.  The  pro- 
tective policy  adopted  at  that  time  has  been  continued  ever  since 
but  we  can  divide  its  history  into  two  main  periods  with  the  Civil 
War  as  the  dividing  point,  the  first  period  being  marked  by  a  relatively 
low  protective  tariff  and  the  second  by  a  distinctly  higher  level  of 
duties.  The  earlier  period  may  be  further  subdivided  into  the  years 
of  rising  duties  culminating  with  the  tariff  of  1828  and  the  succeeding 
years  of  falling  duties. 

The  tariff  of  1816,  which  marks  the  beginning  of  the  new  period, 
did  not  in  most  cases  impose  as  high  a  rate  of  duty  as  had  prevailed 
during  the  war,  though  higher  than  during  the  preceding  years  of 
peace.  The  articles  protected  and  the  method  of  levying  the  duties, 
however,  show  the  distinctly  protectionist  form  which  the  tariff  then 
assumed.  Duties  of  25  per  cent  were  placed  on  manufactures  of 
cotton  and  wool,  to  be  reduced  to  20  per  cent  in  1819.  In  addition 
the  minumum  valuation  on  cotton  cloth  was  to  be  25  cents  a  square 
yard,  thus  giving  a  higher  duty  on  the  cheaper  grades.  A  duty  of 
30  per  cent  was  placed  on  rolled  or  hammered  iron,  leather,  and  several 
other  articles. 

Unusually  severe  competition  from  abroad  coupled  with  industrial 
depression  in  this  country  led  to  a  further  increase  in  the  tariff  of  18 18, 
which  raised  the  duties  on  iron  and  postponed  the  reduction  of  the 
duties  on  cotton  and  woolen  manufactures  till  1826.  Similar  causes 
led  to  another  effort  to  increase  duties  in  1820  and  the  bill  failed  by 
only  one  vote  in  the  Senate.  The  advocates  of  protection  were  more 
successful  in  their  next  attempt  when  the  tariff  of  1824  brought 
another  increase  in  duties,  shared,  among  other  articles,  by  wool, 
hemp,  cutlery,  lead,  and  manufactures  of  cotton,  wool,  silk,  iron, 
hemp,  and  glass.  The  duty  on  the  important  grades  of  wool  and 
cotton  manufactures  was  33^  per  cent  and  the  minimum  valuation 
clause  was  extended  to  woolens.  The  highest  rates  of  duty  reached 
during  this  period,  however,  came  under  the  tariff  of  1828.  Woolen 
cloths  were  granted  a  duty  of  45  per  cent.     Heavy  duties  were  placed 


58o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

on  hemp,  flax,  raw  wool,  molasses,  and  manufactures  of  iron.  For 
purely  political  reasons  many  provisions  objectionable  to  New  England 
manufacturers  were  intentionally  inserted  by  southern  members  in 
the  hope  that  this  would  lead  to  the  defeat  of  the  bill.  Nevertheless, 
it  was  finally  accepted,  though  commonly  spoken  of  as  the  tariff  of 
abominations. 

This  marks  the  end  of  the  upward  movement  of  duties  during  the 
period  preceding  i860.  These  years  between  1816  and  1830  also 
cover  the  most  critical  time  in  the  history  of  our  manufactures.  The 
reasons  for  this  are:  (i)  the  country,  theretofore  almost  exclusively 
given  over  to  agriculture  and  commerce,  was  just  beginning  to  develop 
manufactures;  (2)  technical  processes  in  the  leading  industries  were 
changing  very  rapidly;  (3)  capital  and  labor  suited  for  the  factory 
were  still  relatively  scarce  and  markets  were  limited;  (4)  our  manu- 
factures had  developed  rapidly  under  the  almost  absolute  protection 
of  the  period  of  restricted  commerce  and  now  for  the  first  time  had 
to  face  competition  from  the  more  advanced  manufactures  of  Europe; 
(5)  owing  to  the  great  depression  in  English  industry  which  occurred 
at  this  time  such  competition  was  especially  severe  and  was  felt  the 
more  since  it  was  not  a  period  of  marked  prosperity  in  this  country. 

The  remainder  of  the  period  of  low  protective  tariff,  covering  the 
years  from  1832  to  i860,  is  marked  by  a  general  downward  tendency 
in  duties.  The  chief  reasons  for  this  appear  to  be:  (i)  the  growing 
opposition  of  the  South  and  its  more  dominant  influence  in  public 
affairs;  (2)  the  fact  that  by  1830  the  manufactures  had  passed  through 
the  most  critical  period  of  growth  and  were  sharing  with  the  country 
in  general  the  prosperity  of  the  years  immediately  following  1830; 
(3)  the  favorable  fiscal  situation,  the  government  debt  having  been 
entirely  paid  off  by  1835,  and  the  revenue  in  ordinary  years,  being 
more  than  adequate  to  meet  expenses. 

The  growing  opposition  to  protection  on  the  part  of  the  South  was 
indicated  by  the  Nullification  movement  following  the  tariff  of  1828. 
A  slight  concession  was  made  in  1830  by  the  reduction  of  the  duties 
on  such  revenue-producing  articles  as  salt,  molasses,  coffee,  and  tea. 
This  was  followed  by  the  more  general  reduction  of  the  tariff  of  1832 
which  did  away  with  the  worst  of  the  "abominations"  and  cut  the 
duties  to  about  the  level  of  the  tariff  of  1824.  The  cut  was  carried 
much  farther  by  the  compromise  tariff  of  1833  which  provided  for  a 
gradual  reduction  of  duties  to  a  level  of  20  per  cent  to  be  reached  in 
1842.    The  low  level  lasted  but  a  few  months,  when  a  change  in  the 


TARIFF  POLICY  581 

political  party  in  control  of  the  government,  combined  with  a  tempor- 
ary deficit  in  the  Treasury,  led  to  a  revision  of  the  tariff.  The  tariff 
of  1842  considerably  increased  the  duties.  In  a  few  cases  such  as  iron, 
sugar,  window  glass,  and  salt  they  ranged  much  above  50  per  cent, 
but  the  general  level  was  about  that  of  the  tariff  of  1832.  The 
next  presidential  election  brought  another  change  in  the  party  in 
power  and  consequently  another  tariff  law.  The  tariff  of  1846  or 
Walker  tariff  was  intended  as  a  step  toward  free  trade.  Specific 
duties  were  abolished  and  all  commodities  were  divided  into  classes, 
a  fixed  ad  valorem  rate  being  established  for  each  class.  The  more 
important  commodities  were  placed  in  Classes  C  and  D  with  duties  of 
30  and  25  per  cent  respectively.  There  was  no  further  change  till  the 
tariff  of  1857,  when  a  superabundant  revenue  and  a  decade  of  unusual 
prosperity  led  to  a  further  reduction  with  but  slight  objection.  The 
classes  of  commodities  were  left  about  as  before  but  the  rates  on  Classes 
C  and  D  were  lowered  to  24  and  19  per  cent  respectively,  so  that  the 
average  paid  on  dutiable  imports  was  about  20  per  cent.  The  period 
thus  ending  is  marked  by  lowered  rates  of  duty,  rapidly  advancing 
manufactures,  and  a  lessened  demand  for  protection. 

The  third  period,  1861 — ;  A  high  protective  tariff. — The  Civil  War 
marks  the  beginning  of  a  new  period  in  our  tariff  history,  a  period 
when  the  level  of  duties  prevailing  was  distinctly  higher  and  the 
construction  of  the  tariff  schedules  more  exclusively  designed  to 
secure  protection  than  ever  before. 

As  has  so  frequently  been  the  case,  the  immediate  cause  for  the 
changes  was  due  not  to  the  needs  of  industry  but  to  the  lack  of  revenue. 
In  fact  even  before  the  war  broke  out  the  deficit  in  the  Treasury  follow- 
ing the  decline  in  imports  after  the  panic  of  1857  started  the  move  to 
increase  duties  which  resulted  in  the  Morrill  tariff  of  1861.  The 
outbreak  of  the  war  with  its  enormous  expenses  necessitated  a  large 
increase  in  revenue  and  along  with  the  imposition  of  new  income  and 
internal  revenue  taxes  the  customs  duties  were  increased.  There 
were  many  changes  at  this  time  but  the  most  important  acts  were  those 
of  1862  and  1864,  and  duties  were  advanced  so  rapidly  that  under  the 
tariff  of  1864  the  country  came  out  of  the  war  with  the  rates  on 
dutiable  commodities  averaging  47  per  cent. 

The  most  striking  feature  of  the  period  following  was  that  these 
high  duties,  which  everybody  supposed  were  simply  temporary  and 
only  justified  by  the  existence  of  a  great  national  emergency,  were 
not  appreciably  reduced,  with  the  exception  of  revenue-producing 


S82  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

duties,  but  in  many  cases  still  further  increased  as  time  went  on  so 
that  the  policy  of  high  protection  became  a  permanent  one.  The 
following  are  among  the  more  important  reasons  for  this  change:  (i) 
the  manufacturers,  many  of  whom  suffered  especially  at  the  close  of 
the  war,  having  become  adjusted  to  high  rates  during  a  considerable 
period,  naturally  opposed  any  reduction;  (2)  the  protected  interests 
were  better  organized  than  ever  and  seem  to  have  been  more  potent 
than  formerly;  (3)  the  opposition  of  the  South  was  no  longer  a  factor 
of  such  importance  as  before  the  war;  (4)  it  was  claimed  that  the 
heavy  debt  created  by  the  war  necessitated  more  revenue,  though 
in  fact  the  receipts  from  customs  duties  combined  with  those  from 
internal  revenue  duties  soon  proved  more  than  adequate  for  the  needs 
of  the  government.  This  was  partly  due  to  the  permanent  retention 
of  some  of  the  internal  revenue  duties,  chiefly  those  on  tobacco  and 
distilled  liquors,  which  yielded  so  large  a  return  that  from  this  time 
on  the  customs  duties  made  up  scarcely  more  than  50  per  cent  of 
the  total  receipts  of  the  government  as  compared  with  nearly  90 
per  cent  during  the  period  preceding  the  war.* 

During  the  years  immediately  following  the  war  there  were  a 
number  of  changes  affecting  particular  commodities,  most  of  them 
being  designed  to  abolish  duties  chiefly  revenue-producing  in  character, 
while  others  increased  duties  primarily  for  protection.  Even  then  the 
revenue  receipts  were  excessive,  so  in  1873  a  general  cut  of  10  per  cent 
was  made,  but  in  1875,  when  the  receipts  fell  off  owing  to  the  panic, 
the  old  rates  were  restored.  With  returning  prosperity  in  the  eighties 
the  receipts  far  exceeded  even  the  resulting  lavish  appropriations  of 
Congress  and  caused  the  agitation  which  finally  led  to  a  general 
revision  under  the  tariff  of  1883.  A  small  reduction  was  made  in  a 
considerable  number  of  cases,  though  chiefly  where  protection  was 
either  unnecessary  or  already  excessive,  but  in  some  instances  still 
higher  duties  were  imposed.  The  net  result  was  a  slight  reduction, 
the  average  rate  on  dutiable  commodities  being  38  per  cent. 

During  the  next  few  years  there  were  several  attempts  to  secure 
still  further  reduction,  but  owing  to  the  fact  that  political  power  in 
the  two  branches  of  Congress  was  divided  between  two  parties  nothing 
was  accomplished  till  1890,  when  the  McKinley  tariff  was  passed. 
This  act  brought  in  a  distinctly  higher  level  of  protective  duties,  the 
average  being  49  per  cent.    Among  the  more  important  advances  were 

'  [See  Selection  245,  Chart  of  Principal  Sources  of  Federal  Revenue,  by  Decades, 
1800-1910. — Editors.] 


TARIFF  POLICY  583 

those  on  wool  and  woolens,  silks,  the  finer  cottons,  linens,  cutlery,  and 
tin  plate,  while  a  special  attempt  was  made  to  extend  the  benefits  of 
protection  to  the  farmer  by  duties  on  various  farm  products.  The 
difl5culty  with  the  excessive  revenue  was  met  by  abolishing  the 
duty  of  2  cents  a  pound  on  sugar,  which  yielded  a  large  return,  and 
in  compensation  giving  domestic  sugar-growers  an  equivalent  bounty. 
There  was  also  a  provision  for  reciprocity,  which,  however,  accom- 
plished little. 

The  return  to  power  of  the  Democratic  party  combined  with  a 
deficit  led  to  the  Gorman- Wilson  tariff  of  1894.  As  passed  by  the 
House  several  important  commodities  were  placed  on  the  free  list,  but 
in  the  Senate  opposition  was  so  strong  that  only  raw  wool  was  finally 
left  there.  Reductions  were  made  on  a  large  number  of  commodities, 
but  they  were  not  so  severe  as  had  been  anticipated,  and  the  resulting 
average  rate  of  duty  was  about  40  per  cent.  For  the  sake  of  the 
revenue  a  moderate  duty  on  sugar  was  reimposed  and  an  income 
tax,  later  declared  unconstitutional,  was  added. 

The  Republicans,  victorious  in  a  campaign  fought  over  the 
question  of  free  silver,  no  sooner  returned  to  power  than  the  Dingley 
tariff  of  1897  was  enacted.  Under  this  law  the  protective  duties  were 
advanced  to  an  average  rate  of  57  per  cent,  the  highest  in  the  history 
of  the  country.  The  duty  on  raw  wool  was  restored  and  that  on  sugar 
was  increased  as  were  the  duties  on  most  of  the  textiles. 

In  the  course  of  the  unusually  long  period  during  which  this 
tariff — the  high-water  mark  of  protection — remained  on  the  statute 
books  there  developed  a  widespread  demand  for  a  reduction  of  the 
tariff.  Among  the  more  important  causes  were  the  following: 
(i)  manufacturers  of  the  more  finished  products  supplying  the 
domestic  market  felt  that  the  tariff  increased  the  cost  of  their  raw 
material;  (2)  a  similar  complaint  was  made  by  those  manufacturing 
for  a  foreign  market  where  they  had  to  compete  with  rivals  enjoying 
free  raw  materials;  it  was  also  argued  that  lower  American  duties 
might  secure  concessions  in  the  form  of  lower  duties  on  American 
goods  abroad;  (3)  there  developed  a  feeling  among  the  farming  class 
that  in  actual  operation  protection  chiefly  benefited  the  manufacturer 
while  the  farmer  gained  very  little  and  generally  lost  by  it;  (4)  the 
rapid  growth  of  trusts,  which  many  beHeved  were  at  least  aided  by,  if 
not  primarily  due  to,  the  tariff;  (5)  the  rising  cost  of  living  which  it 
was  argued  could  be  partially  counteracted  by  lower  tariff  duties; 
(6)  the  desire  to  conserve  our  natural  resources,  the  exhaustion  of 


584  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

which  was  hastened  by  the  tariff;  (7)  a  growing  sensitiveness  to  any 
form  of  special  privilege  and  a  feeling  that  the  tariff  was  one  of  the 
chief  sources  of  such  privilege. 

As  a  concession  to  the  popular  demand  the  Payne-Aldrich  tariff 
of  1909  was  passed.  The  generally  announced  plan  to  reduce  duties 
to  an  amount  just  sufficient  to  offset  the  difference  in  cost  between  the 
United  States  and  other  countries  indicated  that  many  had  been 
unnecessarily  high  before.  The  result,  however,  was  disappointing, 
the  reductions  being  slight  and  usually  where  they  had  little  effect. 
It  was  this  dissatisfaction  which  led  the  Democratic  party  on  its 
return  to  power  to  undertake  at  once  a  revision  of  the  tariff. 

The  Underwood  Tariff  act  of  1913  brought  a  very  real  and  sub- 
stantial reduction  in  tariff  duties,  the  most  important  since  the  Civil 
War.  The  average  rate  of  duty  is  estimated  at  slightly  under  30  per 
cent,  a  level  more  nearly  such  as  prevailed  in  the  period  1816-60. 
The  most  important  reductions  were  putting  wool  on  the  free  list, 
with  a  corresponding  reduction  on  maniffactures  of  wool,  and  reducing 
the  duty  on  raw  sugar  to  i  cent  a  pound  March  i,  1914,  with  the  pro- 
vision that  it  should  be  free  after  May  i,  1916.  Among  other  com- 
modities put  on  the  free  list  were  whedt,  meat,  cattle,  sheep,  flax, 
hemp,  iron  ore,  pig  iron,  steel  ingots,  blooms,  slabs  and  rails,  timber, 
coal,  boots  and  shoes.  Important  reductions  were  made  in  the 
duties  on  many  other  commodities,  especially  on  products  supposed 
to  be  controlled  by  trusts,  while  the  duties  on  luxuries  were  generally 
retained  or  increased.  To  provide  in  part  for  the  resulting  loss  in 
revenue  an  income  tax  was  added,  thus  tending  to  shift  a  considerable 
burden  of  taxation  to  the  wealthier  classes.  However,  the  tariff  still 
remains  essentially  protective  in  character. 

Looking  back  over  the  whole  history  of  the  tariff  perhaps  two 
features  stand  out  as  the  most  striking:  (i)  At  the  opening  of  the 
twentieth  century,  when  we  had  become  a  great  manufacturing  nation, 
and  after  nearly  one  hundred  years  of  protection,  our  tariff  duties 
had  advanced  to  the  highest  point  known,  about  twice  as  high  as 
when  the  manufactures  of  the  country  were  in  their  infancy.  (2)  The 
method  of  constructing  the  tariff  schedules  and  the  changes  in  our 
tariffs  have  been  very  largely  determined  by  the  fluctuations  in  the 
fiscal  needs  of  the  government  or  by  the  ups  and  downs  and  general 
exigencies  of  politics  rather  than  by  any  careful  study  of  the  changing 
conditions  in  the  different  industries.  The  tariff  has  been  unscientific 
in  the  extreme. 


TARIFF  POLICY  585 

172.    PRINCIPAL  SOURCES  OF  CUSTOMS  REVENUE,  1912' 

Breadstuffs ^ ._ $4,993,694 

Chemicals,  drugs  and  dyes 7,033,225 

Cotton,  manufactures  of 3S,2S3,iii 

Earthen,  stone  and  china  ware. 5,876,725 

Fibers,  vegetable,  and  textile  grasses  and  manufactures  of . . .  22,698,044 

Fruits  and  nuts 8,407,965 

Iron  and  steel,  manufactures  of 8,837,875 

Silk,  manufactures  of 14,096,458 

Spirits,  wines,  malt  liquors  and  other  beverages 17,328,055 

Sugar 50,603,314 

Tobacco  and  manufactures  of 25,571,508 

Vegetables 6,642,322 

Wool  and  manufactures  of 27,053,480 

All  other  sources 76,925,896 

Total  customs  revenue $311,321,672 


173.  THE  BALANCE  OF  TRADE  AND  PROTECTION 

(a)   A   MERCANTILIST   POINT   OF   VIEW' 

But  for  the  reader's  ease,  I  shall  first  sum  up  what  has  been  said 
as  short  as  possible,  in  the  following  propositions: 

1.  That  the  prosperity  and  happiness  of  this  kingdom  depend 
very  much  upon  our  foreign  trade. 

2.  That  we  have  no  gold  or  silver  of  our  own  growth;  that  all 
we  have  is  imported  from  abroad  in  exchange  for  the  product  and 
manufactures  of  our  own  country. 


'  Compiled  from  the  Statistical  Abstract  of  the  United  States,  1912,  pp.  671-75. 

[For  a  diagrammatic  statement  of  the  importance  of  customs  revenue  in  the 
total  ordinary  receipts  of  the  United  States  government,  see  Selection  245. — 
Editors.] 

'  Adapted  from  Charles  King,  The  British  Merchant,  3d  edition,  1748;  I,   18-35, 

144-45. 

[This  book,  originally  written  in  England  in  17 13,  was  occasioned  by  the 

violent  discussion  aroused  in  that  country  over  the  two  treaties  of  commerce  with 

Portugal  and  with  France,  proposed  at  the  dose  of  the  wars  ended  by  the  Treaty 

of  Utrecht,  and  designed  to  give  greater  freedom  of  trade  between  England  and 

those  countries.    At  that  period  the  balance  of  trade  in  the  commerce  between 

England  and  Portugal  was  favorable  to  England  but  it  was  unfavorable  in  the 

commerce   between   England  and   France.     Hence   British   mercantilist   writers 

favored  the  treaty  with  Portugal  but  were  bitterly  opposed  to  the  treaty  with 

France. — Editors.] 


586  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

3.  That  we  gain  gold  and  silver  from  those  countries  which  do 
not  sell  us  so  great  a  value  of  manufactures  as  they  take  from  us; 
for  in  this  case  the  balance  must  be  paid  in  money. 

4.  That  we  must  pay  a  balance  in  money  to  such  countries  as 
sell  more  manufactures  than  they  take  from  us;  and  that  the  capital 
stock  of  bullion  is  diminished  by  such  a  commerce,  unless  the  goods 
we  import  from  an  over-balancing  country  shall  be  re-exported. 

5.  That  we  are  most  enriched  by  those  countries  which  pay  us 
the  greatest  sums  upon  the  balance;  and  most  impoverished  by 
those  which  carry  off  the  greatest  balance  from  us. 

6.  That  the  trade  of  that  country  which  contributes  most  to  the 
employment  and  subsistence  of  our  people,  and  to  the  improvement 
of  our  lands,  is  the  most  valuable. 

7.  That  the  trade  which  lessens  most  the  subsistence  of  our 
people,  and  the  value  of  our  lands,  is  the  most  detrimental  to  the 
nation. 

8.  That  that  country  which  does  not  sell  us  so  many  manufactures 
as  it  buys  from  us,  contributes  the  whole  value  of  the  balance  to  the 
employment  and  subsistence  of  our  people,  and  to  the  product  of  our 
lands. 

9.  That  the  country  which  sells  us  more  than  it  buys  from  us, 
takes  the  whole  value  of  the  balance  from  the  subsistence  of  our 
people  and  the  landed  interest. 

10.  That  therefore  the  balance  which  is  either  paid  or  received 
by  means  of  our  trade  with  any  particular  country,  is  one  certain 
medium  to  judge  of  the  value  of  our  trade:  That  is,  every  particular 
trade  contributes  so  much  to  the  subsistence  of  our  people  and  the 
improvement  of  our  lands,  as  the  balance  it  pays  to  us  for  the  greater 
quantity  of  manufactures  we  sell  than  buy;  and  it  deducts  so  much 
from  both  for  the  greater  quantity  of  manufactures  we  buy  than  sell, 
as  the  balance  we  are  to  pay. 

11.  And  lastly,  that  every  country  which  takes  off  our  finished 
manufactures,  and  returns  us  unwrought  materials  to  be  manu- 
factured here,  contributes  so  far  to  the  employment  and  subsistence 
of  our  people  as  the  cost  of  manufacturing  those  materials. 

Many  other  maxims  might  be  offered,  but  these  are  sufficient 
to  try  the  value  of  every  particular  trade;  or  all  may  be  still  summed 
up  in  fewer  words,  thus:  That  trade  which  makes  money  flow  in 
most  plentifully  upon  us,  enables  our  people  to  subsist  themselves 
better  by  their  labor,  raises  the  value  of  our  lands,  and  occasions  our 


TARIFF  POLICY  587 

rents  to  be  better  paid,  must  always  be  reckoned  the  best  trade;  for 
these  are  the  only  rules  by  which  it  is  possible  to  state  and  determine 
the  value  of  any  particular  trade,  or  of  the  general  trade  of  the  whole 
nation.    I  shall  illustrate  this  by  a  few  instances. 

If  we  export  any  value  of  our  manufactures  for  the  consumption 
of  a  foreign  nation,  and  import  thence  no  goods  at  all  for  our  own' 
consumption,  it  is  certain  the  whole  price  of  our  own  manufactures 
exported  must  be  paid  to  us  in  money,  and  that  all  the  money  paid 
to  us  is  ouf  clear  gain. 

The  merchant  perhaps  does  not  get  20  per  cent  by  the  goods  he 
sends  abroad;  yet  if  he  sells  his  goods  for  the  very  price  he  paid  for 
them,  and  brings  back  the  whole  price  in  money,  and  not  in  goods, 
to  his  native  country,  the  merchant  in  this  case  gets  nothing,  but  his 
country  gets  clear  the  whole  value  of  the  goods. 

To  make  this  intelligible,  if  I  ask  any  man  what  is  the  gain  of 
the  day-laborer  or  manufacturer,  he  will  answer  me,  that  it  is  just 
so  much  as  he  earns  by  his  work  for  the  subsistence  of  himself  and 
his  family.     His  whole  wages  are  his  gain. 

If  his  whole  time  is  taken  up  in  working  for  the  consumption  of 
the  Portuguese;  for  instance,  if  his  whole  wages  are  paid  him  by  that 
nation,  he  gains  from  Portugal  the  whole  value  of  his  yearly  labor. 
And  the  same  thing  must  be  said  of  the  Portuguese  manufacturer 
that  works  for  the  consumption  of  the  English  nation;  he  clears  his 
whole  wages  from  this  kingdom. 

But  still  the  question  is,  how  much  of  these  wages  is  gained  or 
lost  to  the  one  nation  or  the  other  ? 

It  is  certain,  that  all  that  the  consumption  of  Portugal  pays  to 
the  English  laborers,  more  than  is  paid  by  the  consumption  of  England 
to  the  laborers  of  Portugal,  is  clear  gain  to  England  and  so  much  loss 
to  Portugal.  And  therefore  if  the  wages  of  English  people  for  labor 
bestowed  on  the  corn,  lead,  tin,  woolen,  and  other  manufactures 
exported  to  Portugal,  should  amount  to  £800,000  per  an.  and  the 
wages  of  the  Portuguese  for  their  labor  bestowed  upon  the  wine,  oil, 
fruit,  and  other  products  of  that  country  imported  hither  for  the 
consumption  of  our  people,  should  amount  to  no  more  than  £200,000 
per  an.,  it  is  clear  that  in  the  article  of  wages  for  labor,  setting  the 
wages  of  one  people  against  those  of  the  other,  we  gain  by  the  balance 
£600,000  per  an. 

The  next  question  is,  what  is  gained  or  lost  by  the  exchange  of 
the  product  of  the  land  between  both  nations  ? 


$88  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

And  here  another  question  will  arise,  what  is  gained  by  the  gentle- 
man or  landholder  ?  I  believe  every  man  will  give  me  this  answer, 
that  he  gets  just  so  much  as  is  given  for  the  product  of  the  land,  clear 
of  the  charge  of  labor  that  is  bestowed  upon  it;  and  whoever  is  the 
consumer,  whether  this  or  a  foreign  nation,  pays  the  gentleman  so 
much  of  his  rent. 

If  the  corn,  lead,  tin,  woolen,  or  other  manufactures  of  this 
kingdom,  are  exported  to  Portugal  for  the  consumption  of  that  nation, 
it  is  certain  that  Portugal  pays  the  English  landholder  the' whole  rent, 
or  in  other  words,  the  whole  price  which  is  paid  upon  account  of  rent 
for  those  goods;  which  is  indeed  the  whole  price  that  is  paid  for  them, 
deducting  the  wages  given  for  the  labor  bestowed  upon  them.  The 
same  thing  must  be  said  of  England;  the  landholder  of  Portugal  gets 
just  so  great  a  part  of  his  rent  from  England,  as  is  paid  by  the  con- 
sumption of  this  nation  to  the  rents  of  that  kingdom. 

How  much  then  is  gained  or  lost  to  the  landholders  of  either 
nation  ?  All  that  is  given  for  the  mere  product  of  the  English  lands 
by  the  Portuguese,  more  than  is  given  for  the  mere  product  of  Portugal 
by  the  English,  is  so  much  gain  to  England,  and  so  much  loss  to 
Portugal. 

Suppose  then  that  the  product  of  the  lands  of  England  (clear  of 
the  wages  of  the  laborers)  exported  to  Portugal,  should  amount  to 
£400,000  per  an.  and  that  the  product  of  Portugal,  clear  of  labor, 
imported  into  England,  should  amount  to  no  more  than  £100,000  per 
an.  the  difference  is  £300,000  per  an.  The  English  landholders  gain 
so  much  yearly  from  Portugal,  and  Portugal  loses  so  much  to  this 
nation. 

The  last  thing  is  the  gain  of  the  merchant.  The  merchant  gains 
all  that  part  of  the  price  of  his  goods  in  which  his  sale  exceeds  his 
purchase;  and  this  difference  of  the  price  is  paid  by  the  consumer. 
If  England  is  the  consumer,  the  merchant  gains  this  difference  in 
England,  but  England  gets  nothing  by  her  consumption.  But  if 
Portugal  is  the  consumer  of  the  goods  exported  by  the  English 
merchant,  he  gains  the  whole  difference  from  Portugal.  And  so  in 
like  manner  does  the  Portuguese  merchant  get  from  England  the 
whole  difference  of  the  price  upon  all  goods  which  he  buys  in  Portugal, 
and  sells  to  this  kingdom. 

Suppose  then  that  our  English  merchants  buy  here  the  product 
of  our  lands  manufactured  by  the  labor  of  our  people,  at  the  cost  of 
£1,200,000  per  an.  and  sell  the  same  to  Portugal  for  £1,300,000  per 


TARIFF  POLICY  589 

an.  our  English  merchants  get  from  that  country  £100,000  per  an. 
On  the  other  hand,  if  the  merchants  in  Portugal  buy  there  their  oil, 
wine,  fruit,  etc.  at  the  cost  of  £300,000  per  an.  and  sell  the  same  to 
England  for  £325,000  per  an.  their  gain  from  England  is  no  more 
than  £25,000  per  an.  So  that  in  this  very  article  of  the  merchant's 
gain,  England  would  get  clear  £75,000  per  an.  from  Portugal;  and 
so  much  would  be  yearly  lost  to  that  nation. 

For  my  own  part,  I  know  no  other  way  of  estimating  the  profit 
and  loss  of  trade  between  two  nations.  All  that  the  labor  of  the 
people,  the  product  of  the  lands,  and  the  gain  of  the  merchants  in  one 
nation,  exceed  in  value  those  in  the  other,  is  so  much  gain  to  the 
first,  and  so  much  loss  to  the  second.  This  is  plain  and  obvious  to 
every  person,  even  of  the  meanest  capacity. 

To  illustrate  this  further,  in  trying  the  worth  of  any  particular 
trade  by  the  exports  and  imports  between  two  nations. 

If  we  have  at  any  time  imported  from  France  (for  our  own  con- 
sumption) a  greater  value  of  goods  and  merchandise  than  we  exported 
for  the  consumption  of  that  country,  it  is  certain  that  one  way  or 
other  we  paid  the  balance  in  money;  and  whether  we  paid  this  by 
exporting  bullion  out  of  England,  or  by  drawing  bullion  from  other 
nations  indebted  to  us  into  France,  the  case  is  the  very  same;  that 
whole  balance  was  so  much  loss  to  this  kingdom;  so  much  we  may  be 
said  to  have  lost  by  our  French  commerce. 

But  the  nature  of  goods  and  merchandise  exported  and  imported 
between  the  two  nations,  ought  also  to  be  considered. 

If  we  paid  this  balance  in  money  for  manufactures  which  must 
needs  have  interfered  with  our  own ;  that  is,  which  must  have  hindered 
the  sale  of  such  a  value  of  our  manufactures  at  the  same  market,  and 
did  not  open  a  new  vent  for  them  at  any  other,  it  is  manifest  that  both 
our  landholders  and  our  laborers  must  have  been  deprived  by  means 
of  this  commerce  of  all  those  sums  of  money  which  were  paid  away 
for  the  product  and  manufactures  of  France;  as  also,  that  that  country 
had  been  so  much  enriched  by  the  impoverishment  of  this  kingdom. 

It  is  not  to  be  expected  that  our  own  people  will  ever  buy  the 
product  or  manufactures  of  their  own  country,  if  the  like  are  to  be 
had  cheaper  from  foreign  nations.  Therefore  those  of  foreign 
nations  are  either  prohibited  or  loaded  with  high  duties,  that  our  own 
may  have  no  rival  to  contend  with  among  ourselves.  And  I  make 
no  doubt  that  the  use  of  foreign  manufactures  in  England  will  always 
be  discouraged  by  oiur  legislators  for  this  very  reason,  that  our  own 


590  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

consumption,  which  pays  annually  the  sum  of  42  millions  to  our  own 
product  and  manufactures,  that  is  to  the  rents  of  our  lands  and  the 
labor  of  our  people,  may  never  pay  any  part  of  the  above  mentioned 
sum  to  the  rents  and  labor  of  foreign  nations;  or  at  least  that  sufl&cient 
care  will  be  always  taken  that  the  consumption  of  every  other  nation 
shall  pay  as  much  to  the  rents  and  labor  of  Great  Britain,  as  Great 
Britain  shall  pay  to  any  such  other  nation.  And  there  is  no  way  of 
doing  this  but  by  prohibitions  or  high  duties,  to  prevent  our  being 
overbalanced  by  their  importations. 

(b)    AN   AMERICAN   ARGUMENT^ 

There  can  be  no  question — it  does  not  argue  common-sense  in  any 
man  to  get  up  and  maintain  to  the  contrary  upon  the  great  principles 
of  political  economy — there  can  be  no  question,  I  say,  that  it  is  best 
for  any  country  under  heaven  to  produce  the  articles  it  manufactures 
and  to  manufacture  the  articles  it  produces,  as  far  as  possible.  Any 
government  that  is  a  buyer  of  the  products  of  a  foreign  government 
when  it  can  produce  those  articles  itself,  must  be  engaged  in  a  miser- 
able business  to  the  extent  to  which  it  does  it.  As  has  been  said 
by  the  friend  who  preceded  me,  the  true  wealth  of  a  nation  depends 
upon  the  products  of  its  soil  and  the  labor  that  is  bestowed  in  fitting 
those  products  for  the  use  of  man,  and  every  dollar  which  we  pay 
to  encourage  the  labor  of  other  countries,  to  stimulate  the  production 
of  other  countries,  is  so  much  taken  from  our  own,  and  so  much  taken 
from  the  actual  wealth  of  the  country. 

174.    A  HOME-MARKET  ARGUMENT* 

The  food  supply  is  increasing  more  rapidly  than  population.  In 
the  period  of  39  years,  ending  in  1889,  population  in  the  United 
States  has  increased  175  per  cent;  corn  257  per  cent;  wheat  389  per 
cent;  oats  411  per  cent;  swine  66  per  cent.  The  necessity  for 
increasing  our  home  market  for  corn  and  oats  is  pressing.  Importa- 
tion of  wool  diminishes  the  home  market  and  the  increase  of  our 
flocks  enlarges  it.  If  sheep  flocks  are  increasing,  our  wheat  product 
will  be  reduced,  our  home  demand  for  corn  and  oats  increased,  and 
we  will  have  a  home  market  for  our  cereals.     Every  bushel  of  grain 

'  Transactions  National  Association  of  Wool  Manufacturers,  Proceedings  of 
the  Syracuse  Convention  (1865),  pp.  5-6. 

'Based  upon  William  Lawrence,  A/ew<?ria/  oftheOhio  Wool  Growers'  Association, 
in  Senate  Miscellaneous  Documents,  No.  35,  S3d  Congress,  2d  Session,  pp.  150-52. 


TARIFF  POLICY  591 

exported  carries  away  fertility;  every  pound  of  wool  imported  sup- 
plants so  much  grain,  etc.,  which  we  might  have  grown.  The  home 
market  for  wool  is  the  only  home  market  for  farm  products  never 
supplied. 

Nearly  $100,000,000  annually  sent  out  of  the  United  States  for 
foreign  wool,  including  that  imported  in  manufactures,  should  be  kept 
at  -home  and  go  into  the  pockets  of  American  farmers  in  exchange 
for  American  wool  and  corn  and  oats,  thereby  increasing  the  demand 
for  these  cereals.  And  this  money  is  sent  to  countries  that  take  sub- 
stantially nothing  from  us  but  gold.  When  we  import  wool  we  have 
it  as  an  element  of  perishable  wealth,  and  foreign  countries  take  for 
it  and  have  as  an  element  of  permanent  wealth  the  gold  which  we 
should  have  kept  in  this  country  and  paid  to  American  woolgrowers. 
When  we  produce  all  needed  wools  we  have  them  and  also  the  gold 
which  pays  for  them  for  our  American  citizens,  a  double  source  of 
wealth. 

175.  IMPROVED  TRANSPORTATION  AND  PROTECTION 

(a)   AN  AMERECAN  CAMPAIGN  ARGUMENT' 

Originally  the  danger  to  domestic  industries  from  foreign  compe- 
tition was  much  less  than  at  the  present  time.  Merchandise  brought 
into  any  country  from  abroad  must  first  bear  the  cost  of  transporta- 
tion, and  in  times  when  the  cost  of  transportation  was  great,  and  when 
goods  were  necessarily  transported  by  animal  power  and  by  saihng 
vessels  only,  this  high  cost  of  carriage  was  of  itself  a  protection  to  the 
domestic  producer  in  any  country.  True,  the  producer  of  merchan- 
dise just  across  the  border  line  of  a  country  had  an  enormous  advan- 
tage over  the  producer  a  thousand  or  five  thousand  miles  distant, 
but  as  only  a  small  proportion  of  the  producers  were  located  near 
to  the  border  line  such  countries  did  not  find  it  necessary  to  establish 
high  tariffs  to  protect  their  own  producers  or  manufacturers.  The 
distance  which  foreign  goods  must  be  carried  and  the  cost  of  trans- 
portation over  that  distance  alone  serve  to  create  a  protective  wall 
for  the  domestic  producer.  In  late  years  these  conditions  of  distance 
and  transportation  have  absolutely  changed.  The  railroad  and  the 
modern  steamship  have  reduced  the  cost  of  transportation  compared 
with  that  in  the  early  part  or  even  in  the  middle  of  the  century  just 
ended;  while  the  telegraph  and  the  telephone  have  annihilated  dis- 

»  From  the  Republican  Campaign  Text-Book,  1908,  pp.  106-7. 


592  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

tance  and  time.  Merchandise  from  the  interior  of  Europe,  ordered 
by  telephone,  telegraph,  and  cable,  transported  from  its  place  of 
production  by  trolley  road,  canalized  rivers,  or  boats  operated  by 
steam  or  electricity,  or  by  railway  to  the  Atlantic,  and  thence  by 
great  steamships,  built  to  carry  hundreds  of  carloads  at  a  single 
voyage,  across  the  ocean,  and  again  transported  to  the  interior  of  the 
United  States  by  the  cheapest  land  transportation  ever  known  to  man, 
can  be  placed  at  the  door  of  the  consumer  in  the  Mississippi  Valley 
for  a  very  small  percentage  of  the  cost  of  transporting  the  same  at  the 
middle  of  the  last  century.  As  a  result  the  protection  which  distance 
and  the  cost  of  transportation  afforded  to  the  local  producer  has  dis- 
appeared, and  without  a  protective  tariff,  established  by  the  Govern- 
ment, he  has  as  his  direct  competitor  the  low-priced  labor  of  any  and 
every  part  of  the  world. 

(b)   A  SPANISH  ANALOGY* 

Some  years  ago  I  happened  to  be  at  Madrid,  and  went  to  the 
Cortes.  The  subject  of  debate  was  a  proposed  treaty  with  Portugal 
for  improving  the  navigation  of  the  Douro.  One  of  the  deputies 
rose  and  said:  "If  the  navigation  of  the  Douro  is  improved  in  the 
way  now  proposed,  the  traffic  will  be  carried  on  at  less  expense.  The 
grain  of  Portugal  will,  in  consequence,  be  sold  in  the  markets  of  Castile 
at  a  lower  price,  and  will  become  a  formidable  rival  to  our  national 
industry.  I  oppose  the  project,  unless,  indeed,  our  ministers  will 
undertake  to  raise  the  tariff  of  customs  to  the  extent  required  to 
re-establish  the  equilibrium."  The  Assembly  found  the  argument 
unanswerable. 

Three  months  afterward  I  was  at  Lisbon.  The  same  question 
was  discussed  in  the  Senate.  A  noble  hidalgo  made  a  speech:  "Mr. 
President,"  he  said,  "this  project  is  absurd.  You  place  guards,  at 
great  expense,  along  the  banks  of  the  Douro  to  prevent  Portugal  being 
invaded  by  Castilian  grain;  and  at  the  same  time  you  propose,  also 
at  great  e.xpense,  to  facilitate  that  invasion.  This  is  a  piece  of  incon- 
sistency to  which  I  cannot  assent.  Let  us  leave  the  Douro  to  our 
children,  as  it  has  come  to  us  from  our  fathers." 

Afterward,  when  the  subject  of  improving  the  navigation  of  the 
Garonne  was  discussed,  I  remembered  the  arguments  of  the  Iberian 
orators,  and  I  said  to  myself:  If  the  Toulouse  deputies  were  as  good 
economists  as  the  Spanish  deputies,  and  the  representatives  of  Bor- 

'  From  Fr6d6ric  Bastiat,  Sophismes  iconomiques,  translated  by  P.  J.  Stirling, 
p.  9^100.     G.  P.  Putnam's  Sons,  1909, 


TARIFF  POLICY  593 

deaux  as  acute  logicians  as  those  of  Oporto,  assuredly  they  would 
leave  the  Garonne 

Dormir  au  bruit  flatteur  de  son  onde  naissante; 

for  the  canalization  of  the  Garonne  would  favor  the  invasion  of 
Toulouse  products,  to  the  prejudice  of  Bordeaux,  and  the  inundation 
of  Bordeaux  products  would  do  the  same  thing  to  the  detriment  of 
Toulouse. 

176.    TWO  PROPOSALS  FOR  INCREASING  THE  DEMAND  FOR 

LABOR' 

I.      A   CHINESE   EXPEDIENT 

There  were  in  China  two  large  towns,  called  Tchin  and  Tchan. 
A  magnificent  canal  united  them.  The  Emperor  thought  fit  to  order 
enormous  blocks  of  stone  to  be  thrown  into  it  for  the  purpose  of 
rendering  it  useless. 

On  seeing  this,  Kouang,  his  first  mandarin,  said  to  him:  "Son 
of  Heaven!  this  is  a  mistake." 

To  which  the  Emperor  replied:    "Kouang,  you  talk  nonsense." 

I  give  you  only  the  substance  of  their  conversation. 

At  the  end  of  three  months  the  Celestial  Emperor  sent  again  for 
the  mandarin,  and  said  to  him:   "Kouang,  behold!" 

And  Kouang  opened  his  eyes,  and  looked. 

And  he  saw  at  some  distance  from  the  canal  a  multitude  of  men 
at  work.  Some  were  excavating,  others  were  filling  up  hollows, 
leveling  and  paving.  And  the  mandarin,  who  was  very  cultivated, 
said  to  himself:  They  are  making  a  highway. 

When  other  three  months  had  elapsed  the  Emperor  sent  again  for 
Kouang,  and  said  to  him:  "Look!" 

And  Kouang  looked. 

And  he  saw  the  road  completed,  and  from  one  end  of  it  to  the 
other  he  saw  here  and  there  inns  for  travelers  erected.  Crowds  of 
pedestrians,  carts,  palanquins,  came  and  went,  and  innumerable 
Chinese,  overcome  with  fatigue,  carried  backward  and  forward 
heavy  burdens  from  Tchin  to  Tchan,  and  from  Tchan  to  Tchin.  And 
Kouang  said  to  himself:  It  is  the  destruction  of  the  canal  which  gives 
employment  to  these  poor  people.  But  the  idea  never  struck  him 
that  their  labor  was  simply  diverted  from  other  employments. 

•  From  Frederic  Bastiat,  Sophismes  iconomiques,  translated  by  P.  J.  Stirling 
pp.  216-20  and  162-64.     G.  P.  Putnam's  Sons,  1909. 


594  MATERI.\LS  FOR  ELEMENTARY  ECONOMICS 

Three  months  more  passed,  and  the  Emperor  said  to  Kouang: 
"Look!" 

And  Kouang  looked. 

And  he  saw  that  the  hostelries  were  full  of  travelers,  and  that  to 
supply  their  wants  there  were  grouped  around  them  butchers'  and 
bakers'  stalls,  shops  for  the  sale  of  edible  birds'  nests.  He  also  saw 
that,  the  Artisans  having  need  of  clothing,  there  had  settled  among 
them  tailors,  shoemakers,  and  those  who  sold  parasols  and  fans; 
and  as  they  could  not  sleep  in  the  open  air,  even  in  the  Celestial 
Empire,  there  were  also  masons,  carpenters,  and  slaters.  Then  there 
were  officers  of  police,  judges,  fakirs;  in  a  word,  a  town  with  its  sub- 
urbs had  risen  round  each  hostelry. 

And  the  Emperor  asked  Kouang  what  he  thought  of  all  this. 

And  Kouang  said  that  he  never  could  have  imagined  that  the 
destruction  of  a  canal  could  have  provided  employment  for  so  many 
people;  for  the  thought  never  struck  him  that  this  was  not  employ- 
ment created  but  labor  diverted  from  other  employments,  and  that  men 
would  have  eaten  and  drank  in  passing  along  the  canal  as  well  as  in 
passing  along  the  highroad. 

n.      A   FRENCH   PETITION   TO   THE   KING 

Sire:  When  we  observe  these  free  trade  advocates  boldly  dis- 
seminating their  doctrines,  and  maintaining  that  the  right  of  buying 
and  selling  is  implied  in  the  right  of  property  (as  has  been  urged 
by  M.  Billault  in  the  true  style  of  a  special  pleader),  we  may  be  per- 
mitted to  feel  serious  alarm  as  to  the  fate  of  our  national  labor;  for 
what  would  Frenchmen  make  of  their  heads  and  their  hands  were 
they  free  ? 

The  administration  which  you  have  honored  with  your  confidence 
has  turned  its  attention  to  this  grave  state  of  things,  and  has  sought 
in  its  wisdom  to  discover  a  species  of  protection  which  may  be  substi- 
tuted for  that  which  appears  to  be  getting  out  of  repute.  They  pro- 
pose a  law  to  prohibit  your  faithful  subjects  from  using  their  right  hands. 

Sire,  we  beseech  you  not  to  do  us  the  injustice  of  supposing  that 
we  have  adopted  lightly  and  without  due  deliberation  a  measure  which 
at  first  sight  may  appear  somewhat  whimsical.  A  profound  study  of 
the  system  of  protection  has  taught  us  this  syllogism,  upon  which  the 
whole  doctrine  reposes:  The  more  men  work,  the  richer  they  become; 
the  more  difficulties  there  are  to  be  overcome,  the  more  work;  ergo,  the 
more  difficulties  there  are  to  be  overcome,  the  richer  they  become. 


TARIFF  POLICY 


595 


In  fact,  what  is  protection,  if  it  is  not  an  ingenious  application 
of  this  reasoning — reasoning  so  close  and  conclusive  as  to  balk  the 
subtlety  of  M.  Billault  himself  ? 

Let  us  personify  the  country,  and  regard  it  as  a  collective  being 
with  thirty  millions  of  mouths,  and,  as  a  natural  consequence  with 
sixty  millions  of  hands.  Here  is  a  man  who  makes  a  French  clock, 
which  he  can  exchange  in  Belgium  for  ten  hundredweights  of  iron. 
But  we  tell  him  to  make  the  iron  himself.  He  replies:  "I  cannot,  it 
would  occupy  too  much  of  my  time;  I  should  produce  only  five 
hundredweights  of  iron  during  the  time  I  am  occupied  in  making  a 
clock."  Utopian  dreamer,  we  reply,  that  is  the  very  reason  why  we 
forbid  you  to  make  the  clock,  and  order  you  to  make  the  iron.  Don't 
you  see  we  are  providing  employment  for  you  ? 

Sire,  it  cannot  have  escaped  your  sagacity  that  this  is  exactly  the 
same  thing  in  effect  as  if  we  were  to  say  to  the  country.  Work  with  your 
left  hand  and  not  with  the  right. 

To  create  obstacles  in  order  to  furnish  labor  with  an  opportunity 
of  developing  itself  was  the  principle  of  the  old  system  of  restriction, 
and  it  is  the  principle  likewise  of  the  new  system  which  is  now  being 
inaugurated.  Sire,  to  regulate  industry  in  this  way  is  not  to  innovate, 
but  to  persevere. 

As  regards  the  efficiency  of  the  measure,  it  is  incontestable.  It  is 
difficult,  much  more  difficult  than  one  would  suppose,  to  do  with  the 
left  hand  what  we  have  been  accustomed  to  do  with  the  right.  You 
will  be  convinced  of  this,  Sire,  if  you  will  condescend  to  make  trial 
of  our  system  in  a  process  which  must  be  familiar  to  you;  as,  for 
example,  in  shuffling  a  pack  of  cards.  For  this  reason,  we  flatter  our- 
selves that  we  are  opening  to  labor  an  unlimited  career. 

When  workmen  in  all  departments  of  industry  are  thus  confined  to 
the  use  of  the  left  ];iand,  we  may  figure  to  ourselves,  Sire,  the  immense 
number  of  people  that  will  be  wanted  to  supply  the  present  consump- 
tion, assuming  it  to  continue  invariable,  as  we  always  do  when  we  com- 
pare two  different  systems  of  production  with  one  another.  So 
prodigious  a  demand  for  manual  labor  cannot  fail  to  induce  a  great 
rise  of  wages,  and  pauperism  will  disappear  as  if  by  enchantment. 

Sire,  your  paternal  heart  will  rejoice  to  think  that  this  new  law  of 
ours  will  extend  its  benefits  to  that  interesting  part  of  the  community 
whose  destinies  engage  all  your  solicitude.  What  is  the  present 
destiny  of  women  in  France  ?  The  bolder  and  more  hardy  sex  drives 
them  insensibly  out  of  every  department  of  industry. 


596  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

But  the  moment  your  new  law  comes  into  operation,  the  moment 
ripht  hands  are  amputated  or  tied  up,  the  face  of  everything  will  be 
changed.  Twenty  times,  thirty  times,  more  embroiderers,  polishers, 
laundresses,  seamstresses,  milliners,  shirtmakers  will  not  be  sufTicient 
to  supply  the  wants  of  the  kingdom,  always  assuming,  as  before,  the 
consumption  to  be  the  same. 

This  assumption  may  very  likely  be  disputed  by  some  cold 
theorists,  for  dress  and  everything  else  will  then  be  dearer.  The  same 
thing  may  be  said  of  the  iron  which  we  extract  from  our  own  mines, 
compared  with  the  iron  we  could  obtain  in  exchange  for  our  wines. 
This  argument,  therefore,  does  not  tell  more  against  left-handed  men 
than  against  protection,  for  this  very  dearness  is  the  effect  and  the 
sign  of  an- excess  of  work  and  exertion,  which  is  precisely  the  basis 
upon  which,  in  both  cases,  we  contend  that  the  prosperity  of  the  work- 
ing classes  is  founded. 

Yes,  we  can  make  a  touching  picture  of  the  prosperity  of  the 
millinery  business.  What  movement!  What  activity!  What  life! 
Every  dress  will  occupy  a  hundred  fingers,  instead  of  ten.  No  young 
woman  will  be  idle,  and  we  have  no  need.  Sire,  to  indicate  to  your 
perspicacity  the  moral  consequences  of  this  great  revolution.  Not 
only  will  there  be  more  young  women  employed,  but  each  of  them 
will  earn  more,  for  they  will  be  unable  to  supply  the  demand;  and  if 
competition  shall  again  show  itself,  it  will  not  be  among  the  seam- 
stresses who  make  the  dresses,  but  among  the  fine  ladies  who  wear 
them. 

You  must  see  then.  Sire,  that  our  proposal  is  not  only  in  strict 
conformity  with  the  economic  traditions  of  the  government,  but  it  is 
in  itself  essentially  moral  and  popular. 

To  appreciate  its  effects,  let  us  suppose  the  law  passed  and  in 
operation — let  us  transport  ourselves  in  imagination  into  the  future — 
and  assume  the  new  system  to  have  been  in  operation  for  twenty  years. 
Idleness  is  banished  from  the  country;  ease  and  concord,  contentment 
and  morality,  have,  with  employment,  been  introduced  into  every 
family — no  more  poverty,  no  more  vice.  The  left  hand  being  very 
awkward  at  all  work,  employment  will  be  abundant,  and  the  remunera- 
tion adequate.  Everything  is  arranged  on  this  footing,  and  the 
work  shops  in  consequence  are  full.  If,  in  such  circumstances. 
Sir,  Utopian  dreamers  were  all  at  once  to  agitate  for  the  right  hand 
being  again  set  free,  would  they  not  throw  the  whole  comitry 
into  alarm  ?     Would  such  a  pretended  reform  not  overturn  the  whole 


TARIFF  POLICY  597 

existing  state  of  things?    Then  our  system  must  be  good,  since  it 
could  not  be  put  an  end  to  without  universal  suffering. 

And  yet  we  confess  we  have  the  melancholy  presentiment  (so 
great  is  human  perversity)  that  some  day  there  will  be  formed  an 
association  for  right-hand  freedom. 


177.    THE  LAW  OF  COMPARATIVE  COSTS  AND  THE  WORKING 

OF  THE  TARIFF' 

No  one  can  expect  to  have  a  well-grounded  opinion  on  the  pro- 
tective controversy  who  is  not  trained  in  general  economic  reasoning; 
and  any  conclusions  he  may  reach  on  general  reasoning  cannot  be 
proved  by  facts  and  figures.  If  his  general  conclusions  are  once 
firmly  fixed  in  his  mind,  he  can  simply  illustrate  them  by  facts  derived 
from  history  and  statistics. 

There  are,  however,  some  aspects  of  the  tariff  question  on  which 
the  inductive  and  historical  mode  of  inquiry  is  more  helpful.  The 
protective  policy  of  the  United  States  has  had  unexpected  successes 
and  surprising  failures.  By  successes  here  I  mean  that  sometimes 
the  duties  have  brought  about  a  considerable  development  of  the 
protected  industry;  while  by  failures,  I  would  describe  those  cases 
in  which  there  has  been  an  absence  of  such  development.  It  need 
not  be  repeated  that  success  or  failure  in  this  sense  does  not  necessarily 
imply  advantage  or  disadvantage  to  the  community  at  large:  it 
indicates  only  whether  the  immediate  object  in  view  has  been  attained 
by  the  protective  measures.  There  have  been  curious  differences 
in  the  extent  to  which  this  primary  object  of  protection  has  been 
attained;  and  the  results  have  varied,  not  only  in  different  branches 
of  manufactures,  but,  what  is  more  surprising,  in  different  sorts  of 
agricultural  production.  The  history  of  some  cases  of  this  kind 
throws  light  at  least  on  some  important  questions  bearing  on  the 
protective  controversy.  It  helps  in  ascertaining  what  would  probably 
have  been  the  general  character  of  our  industries  if  there  had  been 
no  protection ;  whether,  for  example,  without  high  duties  the  United 
States  would  be  an  exclusively  agricultural  country.  It  serves, 
moreover,  to  illustrate,  if  not  to  prove,  a  familiar  economic  prin- 
ciple— the  doctrine  that  comparative  costs  determine  the  range  of 
international  trade. 

•  Adapted  from  F.  W.  Taussig,  The  Tarijf  History  of  the  United  States,  4th  ed. 
pp.  364-409.     G.  P.  Putnam's  Sons,  1899. 


598  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  first  case  to  which  I  will  turn  is  that  of  the  production  of 
flax  fiber.  In  general,  agricultural  commodities  are  exported  from 
the  United  States  on  a  large  scale,  and  protective  duties  on  them, 
while  they  have  been  frequently  imposed,  are  nominal:  agricultural 
products  would  not  be  imported  in  any  event.  But  with  flax  we 
find  the  reverse  of  the  usual  conditions.  Flax  has  been  imported 
into  this  country  for  generations,  and  import  duties  have  had  no 
perceptible   effect  in   checking   importation   or   in   stimulating   the 

production  of  flax  at  home The  small  quantity  of  flax  now 

raised  is  of  coarse  quality,  quite  unsuited  to  the  making  of  linen 
cloth.  Meanwhile,  importation  continues  steadily.  The  imports  of 
flax  fiber  were  in  1886,  3,700  tons,  and  in  1890  about  5,500  tons.  The 
act  of  1890  made  a  further  attempt  to  check  imports  and  stimulate 
home  production  by  again  increasing  the  duty,  but  the  same  causes 
which  made  earlier  efforts  of  this  sort  futile  remain  in  force  to  check 
this  one. 

What,  now,  is  the  explanation  of  a  state  of  things  so  different 
from  that  which  prevails  as  to  most  agricultural  products  ?  We  get 
hints  towards  a  solution  of  the  problem  by  examining  the  conditions 
under  which  flax  is  raised  in  foreign  countries.  In  the  first  place, 
flax  is  eminently  a  product  of  intensive  culture,  grown  in  countries 
like  Belgium  and  France,  whose  agriculture  is  typical  of  intensive 
culture.  A  laborious  and  careful  preparation  of  the  ground  is  required. 
Several  ploughings  and  harrowings  are  called  for;  for  the  best  flax, 
the  land  is  trenched  by  spade.  The  ground  must  be  carefully  weeded, 
and  "in  Belgium  the  weeding  is  done  by  hand,  when  the  plants  are 
a  few  inches  high,  by  women  and  children  who  crawl  about  on  their 
hands  and  knees,  with  cloths  to  protect  them  from  the  ground,  work- 
ing always  towards  the  wind,  so  that  the  plants  may  be  at  once 
blown  back  to  an  upright  position."  From  twenty-five  to  thirty 
tons  of  manure  per  acre  are  ploughed  in,  and,  in  addition,  liquid 
manure  is  applied.  The  harvest  is  as  laborious  as  the  preparation. 
The  plants  are  pulled  .by  the  roots;  for  cutting  by  machine  or  by 
scythe  spoils  the  fiber,  and,  moreover,  the  parts  of  the  plant  nearest 
the  ground,  which  is  lost  by  cutting,  contains  the  best  fiber. 

The  process  of  preparing  flax  for  market,  however,  is  by  no  means 
completed  when  it  has  been  taken  from  the  ground.  It  must  first 
be  rotted,  then  scutched,  finally  hackled.  Rotting  consists  in  immers- 
ing the  plants  in  water,  and  thereby  loosening  the  coarse  external 
covering  from  the  inner  fiber  which  is  to  be  converted  into  linen. 


TARIFF  POLICY  599 

In  the  United  States,  this  has  been  done  for  both  flax  and  hemp  by 
"dew-rotting" — that  is,  leaving  the  plants  exposed  to  the  dew  in  the 
fields;  but  this  method,  while  simple  and  easy,  makes  poor  fiber. 
Fiber  of  good  quality  can  only  be  made  by  immersion  for  between 
five  and  ten  days  in  water,  which  becomes  foul  and  noisome  from 
the  decomposition  of  the  plants.  "The  flax  is  then  removed  from 
the  pools,  and  in  this  operation  too  much  care  cannot  be  used.  Hooks 
or  pitchforks  injure  the  fiber,  and  the  bundles  must  be  handed  out 
by  a  man  who  stands  in  the  now  disgusting  pool." 

These  bundles,  when  dried,  are  ready  for  the  next  operation, 
scutching,  by  which  the  inner  woody  pith  of  the  plant  is  removed. 
The  ancient  method  of  doing  this  was  simply  to  beat  the  stalks  with 
clubs,  and  the  reader  of  Tourgueneff's  novels  need  not  be  told  that 
this  method  is  still  used  in  Russia.  Elsewhere,  machines  are  in  use, 
but  only  to  a  sHght  extetit.  Machines  for  breaking  up  the  pith  seem 
easy  to  get,  and  are  simple  enough;  in  Ireland,  this  part  of  the  process 
is  carried  out  by  putting  the  stalks  under  cart-wheels.  But  scutching 
proper,  the  removal  of  the  broken  pith,  is  generally  done  by  hand 
"by  beating  the  fiber  with  a  blunt  knife  while  it  is  held  over  the 
edge  of  a  sharpened  board."  Finally,  after  scutching,  comes  hackling, 
which  corresponds  to  the  carding  or  combing  of  wool  and  cotton,  and 
which  leaves  the  clean  flax  fiber  ready  for  spinning.  This  again  was 
done  universally  by  hand  at  the  time  when  the  Commission  of  1865 
reported;  and  Mr.  Whitman  tells  us  it  is  still  done  "mostly  by  hand 
even  in  large  mills."  The  nature  of  the  fiber  apparently  prevents 
that  use  of  machinery  for  which  wool  and  cotton  are  so  wonderfully 
adapted. 

Hemp  and  flax  are  much  alike,  and  what  has  been  said  in  regard 
to  flax  applies  in  the  main  to  hemp.  Hemp  of  good  quaHty  must 
also  be  heavily  manured,  should  be  pulled  or  cut  close  to  the  ground, 
water-rotted,  scutched,  and  hackled.  Bounties  on  hemp  as  well  as 
on  flax  were  given  in  colonial  times,  and  duties  have  been  imposed 
on  it  without  interruption  since  the  formation  of  the  Union;  yet 
hemp  of  the  finer  sort  has  never  been  raised,  and  has  always  been 
imported  in  considerable  quantities. 

It  should  be  noted,  however,  that  the  preceding  remarks  apply 
only  to  the  cultivation  of  flax  and  hemp  for  the  purpose  of  obtaining 
good  fiber.  Flax  is  grown  in  large  quantities  in  the  United  States 
for  the  seed,  and  hemp  of  coarse  quality  is  grown  in  considerable 
quantities.     Flax  for  seed  need  not  be  heavily  manured,  nor  need 


6oo  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  seed  be  thickly  soTvn;  weeding  is  unnecessary;  the  plants  may 
be  cut  by  scythe  or  machine;  the  seeds  are  easily  and  quickly  sepa- 
rated from  the  fiber.  Seed  is  produced  plentifully  under  these 
conditions,  and  is  sold  to  oil  mills;  but  the  flax  straw  becomes  coarse 
and  almost  useless,  and  is  generally  burnt  on  the  fields  or  sold  for  a 
trifle.  Hemp  cultivated  in  the  same  way,  and  then  dew-rotted, 
yields  a  coarse  fiber,  suitable  for  bagging  and  other  coarse  fabrics; 
and  it  has  been  grown  for  such  uses  in  considerable  quantities,  mainly 
in  Kentucky.  In  recent  years,  however,  jute  and  other  tropical 
substitutes  have  displaced  it  even  for  these  purposes,  and  its  culti- 
vation seems  to  be  unprofitable. 

The  characteristics  of  the  branches  of  agriculture  which  we  have 
been  considering  are,  obviously,  intensive  cultivation  and  little  use 
of  machinery.  The  American  farmer  spreads  his  labor  and  capital 
thin  over  a  large  surface  of  land;  and  he  uses  machinery  and  labor- 
saving  devices  vastly  more  than  the  peasant  or  the  landed  proprietor 
of  continental  Europe.  It  is  generally  implied,  in  discussions  of  our 
international  trade,  that  the  extent  and  fertility  of  our  soil  explain 
our  great  agricultural  exports.  This  is  true,  as  far  as  it  goes.  But 
it  should  be  qualified  by  adding  that  the  products  for  which  we  have 
the  most  decided  advantage  and  which  we  export  in  largest  quantity 
are  those  suited  not  only  for  extensive  cultivation,  but  suited  also 
for  the  liberal  use  of  agricultural  machinery.  Wheat  and  corn  are 
the  readiest  examples  of  such  products,  and  it  is  mainly  for  growing 
and  harvesting  these  that  we  have  achieved  our  triumphs  in  agricul- 
tural machinery.  Flax  and  hemp,  on  the  other  hand,  require  inten- 
sive culture,  and  admit  of  little  aid  from  labor-saving  devices.  The 
causes,  therefore,  of  the  agricultural  competition  of  America,  which 
has  had  so  great  an  effect  on  the  economic  history  of  the  last  twenty 
years,  are  to  be  found  not  only  in  physical  conditions  of  soil  and 
climate,  but  also  in  those  moral  and  intellectual  differences  which 
lead  the  American  to  use  better  tools  and  more  machinery  than  his 
European  competitor 

If  greater  use  of  machinery,  more  intelligent  use  of  time,  and 
steadier  exertion  were  of  equal  advantage  in  all  branches  of  agri- 
culture, they  would  not  affect  international  trade;  but  they  tell 
more  in  some  branches  than  in  others.  The  American  farmer  tends 
to  confine  his  agriculture  to  those  products  for  which  they  tell,  and 
the  country  imports  agricultural  products  for  which  they  do  not  tell. 
The  rule  does  not,  of  course,  hold  good  in  all  branches  of  agriculture. 


TARIFF  POLICY  60 1 

Peculiar  advantages  of  soil  and  climate  suffice  in  some  cases,  of  which 
cotton  and  tobacco  are  the  most  obvious  and  important,  to  give  a 
superiority  little  affected  by  greater  efficiency  or  intelligence.  But 
the  most  striking  features  in  our  agricultural  situation  seem  to  be 
explained  by  this  sort  of  reasoning;  not  indeed  by  this  solely,  but 
by  this  taken  together  with  the  effects  of  a  wide  extent  of  virgin  and 
fertile  soil. 

We  may  now  turn  to  another  set  of  cases,  in  manufacturing 
industry,  where  a  similarly  uneven  working  of  protection  has  shown 
itself.  The  first  case  of  this  kind  is  in  the  silk  manufacture,  which 
I  will  examine  with  some  detail. 

The  manufacture  of  silk  goods  in  the  United  States  is  in  the 
main  of  recent  date,  having  come  into  being  since  the  Civil  War. 
To  this  general  statement,  however,  there  are  two  exceptions.  Sewing- 
silk  has  been  made,  in  one  way  or  another,  for  over  a  century. 
For  fifty  years  after  the  Revolution,  its  manufacture  was  carried 
on,  chiefly  in  Connecticut,  as  a  household  industry.  About  1829, 
machinery  began  to  be  invented,  was  continually  improved,  and  made 
the  industry  a  manufacture  in  the  modern  sense  of  the  term.  In 
1852,  a  new  step  was  taken  in  the  production  of  machine- twist  for 
the  sewing-machines  which  were  coming  into  general  use.  A  very 
lar6e  development  of  this  branch  of  the  industry  took  place,  and  the 
Census  of  i860  reported  the  value  of  sewing-silk  made  to  be  no  less 
than  $3,600,000.  The  second  branch  of  the  silk  manufacture  which 
sprang  up  before  the  Civil  War,  was  the  making  of  fringes  and  trim- 
mings. We  have  little  information  as  to  its  early  history,  but  in 
i860  its  products  were  found  by  the  census  to  be  worth  $2,800,000. 
Neither  the  manufacture  of  sewing-silk  nor  that  of  trimmings  received 
during  this  period  any  special  encouragement  from  import  duties. 
Sewing-silk  had  been  admitted  between  1833  and  1841  at  a  duty 
which  gradually  went  down  from  40  to  20  per  cent.  Other  silk 
manufactures  were  admitted  free  of  duty.  The  tariff  act  of  1842 
imposed  higher  specffic  duties  for  a  few  years,  but  the  act  of  1846 
imposed  a  duty  of  30  per  cent  on  sewing-silk  and  one  of  25  per  cent 
on  other  silk  manufactures.  These  rates  were  reduced  to  24  and 
19  per  cent  respectively  in  1857.  Notwithstanding  these  moderate 
duties — moderate,  at  least,  in  comparison  with  those  of  later  years — 
there  was  a  marked  growth  in  the  manufacture  of  sewing-silk  and  of 
trimmings  between  1850  and  i860.  Other  branches  of  the  silk 
manufacture,  however,  did  not  exist.     Almost  all  silk  goods  were 


6o2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

obtained  by  importation  from  abroad.  The  duty  on  them  was  a 
simple  revenue  duty;  and  no  question  arose  as  to  domestic  production 
or  protective  duties. 

After  the  Civil  War,  the  situation  changed  completely.  During 
the  war  an  increase  in  the  silk  duties  was  a  natural  resource  for 
securing  greater  revenue;  and  in  1864  the  general  duty  was  60  per 
cent.  Like  so  many  other  of  the  duties  imposed  at  that  time,  it 
remained  substantially  unchanged  after  the  war  closed.  For  more 
than  a  generation  the  protective  policy  has  been  applied  vigorously 
and  continuously  to  this  industry.  The  high  duty  has  brought  into 
existence  a  considerable  and  varied  silk  manufacture.  The  effect 
in  this  case,  unlike  that  of  some  other  duties,  was  not  intentional. 
The  high  duties  on  silks  were  imposed  during  the  war  with  little 
thought  of  protection  and  without  solicitation  from  domestic  pro- 
ducers. In  this  respect  they  differ  from  avowedly  protective  duties, 
like  those  on  wool  and  woolens.  But  they  have  been  followed  by 
more  marked  effects;  they  have  created  an  entirely  new  industry. 
The  development  of  the  silk  manufacture  was  comparatively  slow 
before  1870.  It  proceeded  more  rapidly  in  the  years  of  activity 
preceding  1873.  A  new  stimulus  seems  to  have  been  given  by  the 
Centennial  Exposition  of  1876.  The  manufacture  of  trimmings  on 
a  wider  scale  was  first  undertaken;  then  that  of  ribbons  came;  soon 
afterward  that  of  brocaded  and  colored  silks  and  satins,  followed  by 
that  of  plain  piece-goods.  The  manufacture  of  silk  handkerchiefs 
received  a  remarkable  impulse  from  the  Exposition.  At  the  present 
time,  the  domestic  silk  products  are  at  least  equal  in  value  to  the 
imported.  Many  kinds  of  silk  goods  are  no  longer  imported.  This 
is  the  case  not  only  with  sewing-silks  and  trimmings,  but  with  many 
articles  of  which  the  domestic  production  did  not  begin  before  the 
war,  such  as  handkerchiefs  and  most  kinds  of  ribbons.  Other 
articles,  again,  are  made  little  or  not  at  all,  especially  the  finest 
piece-goods.  Between  these  classes  comes  the  debatable  ground,  on 
which  foreign  and  domestic  silks  compete.  Here  may  be  placed 
most  dress  silks,  but  the  domestic  producers  in  recent  years  have  been 
steadily  increasing  their  hold  on  goods  of  this  sort,  and  now  supply 
much  the  greater  part  of  their  consumption. 

This  brief  sketch  of  the  history  of  the  silk  manufacture  shows 
how  different  has  been  its  development  from  that  of  other  textile 
industries.  The  manufactures  of  cotton  and  wool  attained  a  large 
growth  and  a  firm  position  long  before  the  Civil  War,  while  that  of 


TARIFF  POLICY  603 

silks  is,  in  the  main,  of  very  recent  date.  Silks  are  still  imported 
more  largely  than  other  textile  goods.  The  explanation  of  these 
facts  must  be  sought  in  the  character  and  processes  of  the  industry. 
The  peculiarities  of  the  silk  manufacture  are  the  result  of  the 
qualities  of  silk  fiber.  Raw  silk  is  not  made  in  the  United  States. 
Spasmodic  attempts  to  encourage  its  production  have  been  made, 
by  bounties  during  the  colonial  period,  by  premiums  in  the  early 
years  of  our  national  existence.  At  the  present  time  there  is  a  feeble 
attempt  to  establish  it  in  CaHfornia.  The  hopelessness  of  these 
attempts  has  permitted  raw  silk  to  remain  on  the  free  list,  and  the 
entire  supply  is  obtained  by  importation.  The  raw  silk  so  imported 
differs  in  marked  ways  from  cotton  and  wool.  In  the  first  place,  it 
corresponds  not  so  much  to  raw  cotton  as  to  cotton  carded  and  spun. 
It  has  been  reeled  from  the  cocoons,  perhaps  rereeled;  and  on  the 
character  of  the  reeling  depends  mainly  the  quality  of  the  fiber. 

[There  follows  an  account  of  the  many' delicate  and  laborious  opera- 
tions, where  machine  methods  cannot  be  used,  which  are  necessary  to 
prepare  the  thread  for  use  in  the  loom.] 

Silk  fiber  is  much  less  adapted  to  the  complicated  and  rapidly 
moving  machinery  of  textile  manufactures  than  are  cotton  and  wool. 
It  is  not  surprising  to  learn  that  four-fifths  of  the  looms  in  the  city 
of  Lyons  are  still  hand-looms,  and  that  Crefeld,  the  chief  seat  of  the 
silk  manufacture  in  Germany,  is  a  town  of  household  operatives. 
The  necessities  of  the  situation  compel  the  silk  manufacturers  of 
this  country  to  attempt  the  substitution  of  machinery  for  hand 
labor,  and  the  use  of  more  elaborate  and  more  efl&cient  methods. 
Such  a  change  alone  will  enable  the  manufacture  of  an  article  as 
easily  transportable  as  silks  to  hold  its  own  side  by  side  with  the 
agricultural  industries  in  which  by  far  the  greater  part  of  our  popu- 
lation is  engaged.  The  endeavor  shows  itself  not  only  in  the  con- 
centration of  the  manufacture,  in  the  invention  and  increasing 
application  of  labor-saving  machinery,  in  the  use  of  power-looms 
instead  of  hand  looms,  but  also  in  the,  strenuous  efforts  to  secure  raw 
silk  of  more  even  and  uniform  quality.  The  preference  of  American 
manufacturers  for  the  best  grades  of  raw  silk,  and  their  willingness 
to  pay  good  prices  for  it,  are  not  the  result,  as  one  might  infer  from 
some  allusions  to  it,  of  any  special  virtue  on  their  part.  Their  policy 
is  due  simply  to  the  necessities  of  the  situation.  The  more  uniform 
the  material,  the  more  can  machinery  be  used;  the  greater  the  use 
of  machinery,  the  better  the  chance  of  the  American  producer. 


6o4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Hence  we  find  that  the  various  branches  of  the  silk  manufacture 
have  been  put  in  a  firm  position  in  proportion  to  the  possibility  of 
using  machinery.  Sewing-silk,  the  earhest  branch  and  the  most 
firmly  established,  is  the  product  of  American  inventions.  It  is  not 
surprising  that  machinery  should  be  readily  adapted  to  the  com- 
paratively simple  processes  of  twisting  several  fibers  together,  and 
then  winding  and  spooling  them — which  are  the  essential  processes 
in  making  sewing-silk  and  machine-silk.  Another  illustration  of  the 
same  tendency,  and  a  most  instructive  one,  is  in  the  successful  manu- 
facture of  "spun-silk"  goods.  These  are  made  from  waste  silk; 
that  is,  from  the  fibers  of  damaged  or  incomplete  cocoons,  from  those 
which  are  thrown  aside  as  unfit  for  reeling  in  the  filatures,  and  from 
the  tangled  waste  left  in  the  earlier  operations  of  the  silk  mill.  These 
fibers  are  carded  and  spun  by  methods  very  similar  to  those  used 
for  cotton,  and  they  produce  "a  material  of  such  perfect  uniformity 
that  the  thread  to  be  made  from  it  can  be  produced  with  absolute 
mathematical  accuracy  of  any  required  size."  The  silks  made  from 
it  were  the  original  "American  silks";  they  are  made  with  abundant 
use  of  machinery;  they  are  cheap,  durable,  and  good.  But,  unfor- 
tunately, they  lack  a  certain  luster,  an  agreeable  softness,  and  a 
peculiar  rustling  sound  much  prized  by  our  better-halves.  We  are 
told  that  they  are  "hard."  Those  qualities  in  the  fiber  which  make 
silks  agreeable  to  their  chief  consumers  seem  to  be  lost  in  the  processes 
of  carding  or  rapid  spinning,  and  spun-silk  goods  fail  to  displace 
the  more  insinuating  articles  which  come  from  the  reel.  Yet  their 
consumption  has  steadily  increased.  By  mixture  with  reeled  silk, 
and  by  other  improvements,  their  quality  has  been  made  more  agree- 
able. They  are  said  to  be  specially  well  adapted  for  silk  prints,  and 
in  the  production  of  these  the  characteristics  of  American  manu- 
factures are  again  illustrated.  "In  Europe,  printing  is  done  with 
little  blocks,  a  few  inches  square,  which  are  slowly  and  more  or 
less  imperfectly  used  in  handwork.  Here,  ingenious  machinery  is 
employed,  printing  many  colors  at  once.  A  machine  for  this  purpose 
requires  a  special  engine  to  drive  it,  in  order  to  have  it  under  absolutely 
accurate  control  as  to  speed,  pressure,  and  registry.  Patterns  that 
cannot  be  perfectly  matched  by  hand  may  be  turned  out  faultlessly 
by  such  machinery." 

The  answers  to  the  questions  presented  by  our  sketch  of  the 
history  of  the  silk  manufacture  now  suggest  themselves.  The 
nature  of  the  silk  fiber  was  an  obstacle  to  that  extensive  use  of  labor- 


TARIFF  POLICY  605 

saving  machinery  which  is  characteristic  of  American  industry. 
The  field  is  not  promising  for  the  ingenuity  and  inventiveness  which 
give  American  manufactures  their  distinctive  advantages 

The  progress  of  the  silk  manufacture  in  recent  years  has  been 
extraordinary.  Ten  or  fifteen  years  ago,  American  dress  silks  were 
hardly  heard  of,  and  such  as  existed  were  of  harsh  and  poor  quality. 
At  present,  much  the  larger  part  of  the  dress  silks  which  are  used 
are  of  American  make,  and  they  are  inferior  in  quality  to  none  but 
the  choicest  imported  goods.  The  dress  silks  which  continue  to  be 
imported  are  largely  figured  silks.  Of  such  goods,  no  great  quantity 
of  any  one  piece  can  be  made  with  profit;  there  are  not  likely  to  be 
many  purchasers  whose  tastes  will  be  hit  by  any  particular  pattern. 
It  does  not  pay  to  make  goods  of  this  sort  on  the  power-loom,  which, 
like  all  expensive  machinery,  is  profitable  only  when  it  works  con- 
tinuously and  turns  out  large  quantities  at  a  time.  The  hand-loom 
turns  out  less  at  a  time,  and  is  more  easily  transferred  to  a  new  pattern. 
Figured  silks  are  therefore  more  often  made  in  the  old  way,  and  for 
that  reason,  again,  are  largely  imported.  Probably  the  same  con- 
ditions hold  good,  in  greater  or  less  degree,  of  other  imported  silk 
goods.  The  very  finest  quaHties  of  dress  goods,  such  as  require 
much  individual  attention  from  the  workman — laces,  some  sorts 
of  embroideries,  velvets,  and  goods  which  are  half  silk,  half  cotton, 
or  wool — make  up  the  greater  part  of  the  importations.  But  with 
dress  goods,  as  with  handkerchiefs,  ribbons,  upholstery  silks,  the 
American  manufacturers  have  wellnigh  driven  out  their  foreign 
competitors.  They  would  continue  to  hold  their  own,  even  if  duties 
were  considerably  reduced. 

What  the  position  of  the  silk  manufacture  might  be  if  duties 
were  entirely  swept  away,  it  is  impossible  to  say.  Some  branches 
of  the  manufacture  would  probably  hold  their  own,  while  others 
would  disappear.  Should  there  continue  in  the  future  a  progress 
such  as  has  undoubtedly  been  made  in  recent  years  in  the  American 
silk  manufacture,  it  may  happen  in  the  end  that  most  sorts  of  sUks 
will  be  made  here  as  cheaply  as  abroad,  and  that  the  abolition  of 
protective  duties  would  affect  the  silk  manufacture  as  little  as  it 
would  now  affect  the  bulk  of  the  cotton  manufacture.  If  this  proves 
to  be  the  case,  we  shall  have  an  example,  and  a  striking  one,  of  the 
successful  application  of  protection  to  young  industries.  It  is  unlikely 
that  any  attempts  at  silk-making  would  have  been  made  here  but 
for  the  high  duties  of  the  war,  and  such  progress  as  the  manufacture 


6o6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

has  made  may  be  fairly  ascribed  to  the  stimulus  of  protection.  It 
remains  to  be  seen  whether  this  progress  will  be  continued  so  far  as 
to  attain  the  true  end  of  protection  to  young  industries — the  supply 
of  the  commodity  at  a  price  below  that  of  the  foreign  article.  The 
nature  of  the  fiber  makes  it  improbable  that  there  will  ever  be  any 
such  complete  application  of  machinery  as  in  the  manufacture  of 
cotton  and  wool;  but  no  man  can  say  it  will  not  be  done,  for  the 
march  of  invention  brings  many  surprises.  The  question  turns, 
however,  on  this:  unless  there  is  continued  application  of  machinery 
and  continued  invention  of  labor-saving  processes,  such  as  will  make 
labor  here  more  efficient  than  abroad,  then,  so  long  as  our  general 
economic  conditions  bear  their  present  relations  to  those  of  Europe, 
we  cannot  expect  the  growth  of  a  varied  and  independent  silk  manu- 
facture. 

The  manufacture  of  cutlery  supplies  another  illustration  of  the 
uneven  development  of  industries  apparently  similar.  The  duty  on 
cutlery  for  many  years  was  50  per  cent;  yet  there  is  a  large  and 
regular  importation  of  pocket-knives.  On  the  other  hand,  table 
cutlery,  subject  to  the  same  duty,  is  practically  not  imported  at  all. 
There  is  a  slight  importation  of  table-knives  made  by  certain  English 
firms,  whose  products  some  well-to-do  people,  from  habit  or  prejudice, 
persist  in  preferring;  but  the  bulk  of  the  table-knives  used  are  of 
American  make,  and  are  as  cheap  as  goods  of  the  same  quality  are 
abroad.  The  industry  being  concentrated  in  a  few  large  establish- 
ments, there  is  a  strong  temptation  to  combinations;  and  every  few 
years  there  is  a  combination  of  the  American  manufacturers,  which 
advances  prices,  keeps  them  high  for  a  while,  and  then  goes  to  pieces. 
But  the  knives  are  made  as  cheaply  as  they  are  in  England  and  other 
countries,  and  are  usually  sold  at  prices  as  low.  Pocket-knives  and 
razors,  however,  although  made  to  a  considerable  extent,  cannot  be 
made  so  cheaply  as  in  England  and  Germany,  and  continue  to  be 
imported  in  the  face  of  the  duty.  The  explanation  is  again  that 
machinery  can  be  applied  to  the  one  much  more  than  to  the  other. 
Table-knives  are  made  in  large  quantities  of  a  single  pattern;  they 
have  comparatively  few  pieces;  the  blades  need  no  very  careful 
grinding — and  grinding  is  still  done  largely  by  hand.  A  pocket-knife 
is  a  more  complex  thing;  the  pieces  need  to  be  put  together  by  hand, 
they  must  be  made  to  fit  neatly,  the  blades  must  be  carefully  ground. 
If  the  various  parts  of  a  pocket-knife  could  be  struck  off  by  machinery, 
in  hundreds  or  thousands,  perfect,  and  complete,  and  then  easily 


TARIFF  POLICY  607 

put  together,  pocket-knives  would  doubtless  be  made  in  this  country 
with  complete  success.  Watches  can  be  made  after  that  fashion 
and  afford  a  striking  example  of  American  enterprise,  ingenuity,  and 
success.  But  pocket-knives  need  to  be  of  numberless  patterns.  The 
jobbers  and  retailers,  who  presumably  know  the  likings  of  consumers, 
want  few  knives  of  any  one  style,  and  want  new  patterns  every  season. 
Obviously,  production  on  a  small  scale  and  with  little  machinery,  in 
the  German  fashion,  accommodates  itself  to  such  a  capricious  demand 
much  more  readily  than  the  American  plan  of  using  large  plant, 
expensive  machinery,  and  an  inflexible  process.  That  the  American 
manufacturers  have  not  succeeded  in  getting  command  of  the  domestic 
market  is  indicated  by  the  fact  that  in  1890  and  1897  they  asked, 
and  in  the  tariff  acts  of  those  years  obtained,  a  marked  increase  in 
the  duties. 

Most  smaller  articles  of  hardware,  however,  seem  to  afford 
favorable  opportunities  for  the  inventive  talents  of  American  work- 
men and  business  men.  All  sorts  of  complicated  articles — door- 
knobs, locks,  hinges,  house  hardware  and  household  utensils,  spades, 
axes,  agricultural  implements,  tools  of  all  sorts — are  not  only  made 
cheaply  and  successfully  at  home,  but,  in  spite  of  the  higher  price 
of  the  materials  of  which  they  are  made,  are  regularly  exported  in 
large  quantities.  Where  a  massive  kind  of  production  is  called  for, 
a  huge  plant,  a  steady  routine,  a  rigid  economy  of  materials,  the 
organization  rather  than  the  saving  of  labor,  the  English  in  general 
excel.  This  was  probably  one  cause  of  the  commanding  position 
they  held  so  long  as  the  great  producers  of  the  crude  forms  of  iron; 
though  much  was  also  due  to  the  great  advantage  of  having  rich 
suppHes  of  coal  very  near  the  iron  ore.  In  manufactures  of  a  more 
deHcate  and  refined  character,  if  I  may  use  such  adjectives  in  this 
connection,  the  Americans  excel.  Where  the  nature  of  the  material 
or  of  the  product  gives  opportunity  for  the  deft  use  of  labor-saving 
devices,  the  ingenious  adaptation  of  a  tool  to  just  the  use  desired, 
the  constant  apphcation  of  new  inventions,  American  manufacturers 
are  likely  to  hold  their  own,  tariff  or  no  tariff. 

To  the  present  writer,  it  seems  clear  that  the  phases  of  our  ec- 
onomic history  which  have  been  examined  in  the  preceding  pages,  can 
be  explained  at  bottom  only  on  the  theory  of  comparative  costs, 
which,  as  he  ventures  to  assert  even  at  the  risk  of  being  thought 
magniloquent,  sounds  the  depths  of  the  international  trade  of  the 
United  States.    The  reason  why  the  American  farmer  does  not  pro- 


6o8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

duce  flax  fiber  is  not  to  be  found  in  any  obstacles  from  climate  or 
physical  conditions.  His  labor  would  yield  as  much  flax,  absolutely, 
as  that  of  the  European  cultivator.  He  simply  finds  that  his  labor 
yields  more  in  other  branches  of  agriculture.  Silks,  earthenware, 
windowglass,  continue  to  be  imported,  not  because  of  any  inferior 
productiveness  of  American  labor  in  making  them;  it  is  because  of  a 
lack  of  that  superiority  which  existed  in  other  directions. 

Both  in  manufactures  and  agriculture  account  must  be  taken 
of  moral  and  intellectual  as  well  as  of  physical  causes  of  a  comparative 

advantage Adam  Smith  shrewdly  perceived  that  the  causes 

of  the  advantages  one  country  has  over  another  are  not  all  of  the 
same  kind;  but  he  pointed  out  with  truth  that,  given  the  advantages, 
they  determine  the  course  of  trade.  The  nature  and  the  cause  of  an 
advantage  become  material  only  when  we  begin  to  inquire  whether 
it  is  likely  to  persist  indefinitely,  and  whether  it  can  be  affected  by 
legislation.  Obviously,  a  comparative  advantage,  which  rests  not 
only  on  physical  causes,  but  on  differences  in  skill,  knowledge  of  the 
arts,  mechanical  training,  qualities  of  character  and  intelligence,  may 
be  influenced,  within  limits,  by  a  stimulus  in  the  way  of  premium  or 
protection.  The  argument  for  protection  to  young  industries  applies 
only  under  conditions  of  this  latter  sort.  Given  those  conditions,  it 
may  apply  more  widely  than  English  economists  have  been  disposed 
to  grant.  Protection  to  young  industries,  which  Mill  believed  to  be 
of  positive  advantage  only  in  a  young  country  in  the  earlier  stages 
of  growth,  may  have  had  occasional  and  unexpected  successes  even 
within  the  last  thirty  years.  The  history  of  the  silk  manufacture 
illustrates  the  possible  turn  of  events;  and  the  application  of  pro- 
tection in  the  United  States  has  been  so  sweeping  since  the  Civil 
War  that  this  case,  while  by  no  means  typical  of  the  usual  effects, 
probably  does  not  stand  alone.  But  such  exceptions  serve  here,  as 
they  do  in  all  scientific  investigations,  to  bring  out  the  foundation 
of  a  general  rule  rather  than  to  modify  it.  In  the  present  case,  they 
suggest  a  more  careful  analysis  of  the  causes  of  comparative  advan- 
tages in  different  countries,  but  do  not  affect  the  doctrine  that  these 
advantages  determine  the  sort  of  trade  and  division  of  labor  that  wiD 
take  place  between  them.  Such  phenomena  as  have  been  described 
in  the  preceding  pages  still  reduce  themselves  in  the  last  analysis,  to 
illustrations  of  the  doctrine  of  comparative  costs. 


XIV.    RENT 

178.    THE  ORIGIN  OF  AGRICULTURAL  REISTP 

There  are  various  problems  of  economics,  particularly  some 
connected  with  taxation,  the  solution  of  which  depends  on  a  proper 
understanding  of  the  causes  and  conditions  through  which  rent  is 
brought  into  existence.  Further,  the  continued  reappearance  in 
current  treatises  of  certain  defects  of  statement  which  characterized 
the  earlier  expositions  of  the  true  doctrine,  make  almost  necessary 
a  careful  restatement  of  that  doctrine  with  especial  reference  to  the 
defects  alluded  to. 

And,  first,  we  must  remind  the  student  that  teachers  of  economics, 
with  few  exceptions,  use  the  term  rent  more  narrowly  than  is  common 
with  the  general  public.  By  the  latter,  rent  is  thought  of  as  a  pay- 
ment made  for  the  privilege  of  enjoying  the  use  of  any  material  object, 
a  piece  of  land,  a  house,  a  boat,  or  anything  you  please.  As  used  by 
most  economists,  on  the  other  hand,  rent  means  only  a  payment 
made  for  the  use  of  land — that  land,  further,  being  conceived  as 
unmodified  by  human  art,  or  at  least  modified  only  in  certain  very 
fimdamental,  and  substantially  unalterable,  ways.  Thus,  when  I 
pay  $350  a  year  for  the  use  of  a  house  and  lot,  $120,  perhaps,  will  be 
conceived  as  paid  for  the  use  of  the  lot,  while  $230  is  paid  for  the  use 
of  the  house;  in  which  case  only  the  $120  is  true  rent,  the  $230  being 
more  properly  called  hire  and  consisting  of  mterest,  profit,  wages 
of  management,  and  a  fimd  for  the  maintenance  of  the  capital 
involved.  In  short,  rent — economic  rent — is  a  sum  paid  for  the  use 
of  a  natural  factor,  while  hire  is  paid  for  artificial,  produced  factors. 
Doubtless  one  would  often  find  it  difl&cult,  sometimes  impossible, 
to  distinguish  these  two  things  sharply  and  accurately.  But,  in  the 
main,  they  are  commonly  cut  apart  with  a  fair  degree  of  precision  by 
the  automatic  working  of  the  laws  of  price.  For  example,  it  is  almost 
certain  that,  of  the  total  tax  collected  from  the  owner  of  a  house 
and  lot,  one  portion  is  really  paid  by  him,  while  another  portion  is 
in  the  end  taken  from  the  tenant  in  the  shape  of  higher  rent;  and, 
what  is  more  significant  for  our  purpose,  it  is  also  quite  certain  that 

'  From  F.  M.  Taylor,  Readings  in  Economics,  pp.  181-91.  Privately  pub- 
lished, 1907. 

609 


6io  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  dividing  line  between  these  two  parts  corresponds  pretty  closely 
to  the  line  which  separates  that  portion  of  the  total  value  of  the  place 
which  constitutes  the  value  of  the  lot,  from  that  other  portion  which 
constitutes  the  value  of  the  house. 

So  much  for  the  meaning  of  rent  in  economics;  now  for  its  origin. 
Speaking  broadly,  rent  comes  into  existence  exactly  like  the  value  of 
any  other  thing  the  quantity  of  which  is  absolutely  fixed;  that  is, 
it  comes  into  existence  because  the  thing  paid  for — the  use  of  land — 
has  a  marginal  utility.  In  other  words,  if  land  of  a  given  grade  bears 
rent,  it  is  certain  that  society  has  a  use  for  every  piece  belonging  to 
that  grade — that  that  piece,  among  all  pieces  of  the  grade  in  question, 
which  is  put  to  the  least  important  use  is  after  all  put  to  some  use. 
No  piece  can  be  spared.  The  grade  in  general  has  marginal  utility, 
importance,  significance.  But,  while  in  general  rent,  like  similar 
cases  of  value  where  the  stock  of  the  particular  form  of  wealth  is 
absolutely  fixed,  owes  its  origin  to  the  marginal  utility  of  that  for 
which  rent  is  paid,  it  is  usual  in  this  case  to  go  deeper,  to  inquire  into 
the  more  ultimate  causes  of  rent,  particularly  agricultural  rent. 
Accordingly,  the  classic  theory  as  to  the  origin  of  rent  is  a  theory  as 
to  the  deeper  phases  of  the  process  whereby  agricultural  rent  comes 
into  existence. 

In  presenting  the  theory,  it  is  perhaps  best  to  begin  with  the  hy- 
pothesis that  all  the  land  is  of  one  grade — i.e.,  can  furnish  produce 
(wheat  we  will  say)  at  substantially  one  cost — and  that  its  productive 
eflficiency  is  absolutely  fixed — it  can  raise,  say,  30  bushels  of  wheat 
at  a  cost  of  30  cents  per  bushel,  no  more  and  no  less.  Such  a  hypothe- 
sis is,  of  course,  in  the  highest  degree  unreal,  but  will  serve  us  best 
in  bringing  out  the  essential  cause  of  rent.  After  this  is  done,  we  will 
change  the  hypothesis  into  closer  accord  with  facts  and  show  how  the 
same  cause  still  operates  to  produce  rent.  So,  then,  let  us  imagine 
ourselves  to  be  dealing  with  the  small,  completely  isolated  island 
of  classical  convention.  On  that  island  there  are  1,000  acres  of  wheat 
land,  each  acre  of  which  can  produce  30  bushels,  no  more  and  no  less, 
at  a  cost  of  just  30  cents  per  bushel,  not  counting  any  charge  for  the 
use  of  land.  If  all  the  land  is  used,  the  output  will  then  be  30,00c 
bushels  costing  $9,000. 

Such  being  the  purely  technical  conditions,  let  us  now  study  the 
economics  of  the  case.  Let  us  suppose  that  at  a  certain  time  the 
demand  for  wheat  at  30  cents  is  only  2,000  bushels,  while  it  falls  to 
1,900  bushels  at  3 1  cents,  1,850  at  32  cents.  1,800  at  33  cents,  and  so  on. 


RENT  6n 

Under  these  conditions,  could  there  be  any  rent  ?  No ;  for,  sinc*^ 
the  possible  output  of  wheat  is  much  greater  than  the  demand  at  any 
price  as  high  as  cost,  most  of  the  land  will  not  be  used  at  all,  and  the 
potential  competition  of  the  owners  of  such  land  will  hinder  the  owners 
of  the  land  under  cultivation  from  exacting  any  payment  for  the  use 
of  their  land.  Again,  under  the  conditions  supposed,  what  will  be 
the  price  of  wheat  ?  Answer:  it  will  be  just  thirty  cents.  It  cannot 
be  lower;  for  in  that  case  wheat  would  not  be  produced  at  all.  It 
cannot  be  higher;  for,  it  being  possible  at  that  cost  to  furnish  more 
than  is  demanded  at  that  price  or  higher,  the  competition  of  producers 
will  hold  price  down  to  that  figure.  Finally,  these  two  conclusions 
will  still  hold  so  long  as  demand  at  30  cents  is  anything  under  30,000 
bushels,  say  5,000,  or  10,000,  or  20,000,  or  anything  up  to  29,999. 

But  change  slightly  the  conditions.  Suppose  that  the  demand 
increases,  so  that  31,000  bushels  are  wanted  at  30  cents,  30,000  at 
31  cents,  29,000  at  32  cents,  and  so  on.  Under  these  conditions  price, 
plainly,  will  advance  to  31  cents;  for  only  30,000  bushels  can  be 
produced  and  they  are  all  wanted  at  31  cents.  But,  since  cost  is  only 
30  cents,  this  new  price  will  give  farmers  a  surplus  over  ordinary 
returns  to  industry  of  i  cent  a  bushel  or  30  cents  an  acre.  But  this 
surplus  will  naturally  invite  producers  who  in  other  lines  are  getting 
merely  the  usual  returns  of  industry  to  offer  to  pay  the  land  owner 
something  for  the  right  to  use  the  land.  The  present  tenant  will 
raise  the  ofi"er;  the  outsiders  will  come  back  with  a  higher  bid;  and 
so  on  till  the  competition  of  the  two  has  caused  substantially  the  whole 
thirty  cents  to  be  turned  over  to  the  land  owner.  The  surplus  thus 
turned  over  is  rent.^ 

Looking  back  over  this  case,  we  see  that  the  immediate  cause  of 
the  rent  surplus  is  the  appearance  of  a  price  in  excess  of  the  cost  of 
production.  But  the  cause  of  this  higher  price,  and  so  the  more  ulti- 
mate cause  of  rent,  is  to  be  found  in  the  fact  that  the  demand  for  wheat 
at  a  price  higher  than  cost  is  at  least  equal  to  the  whole  possible  output; 
or,  put  the  other  end  to,  in  the  fact  that  the  possible  output  is  no 

•  The  above  explanation  has  assumed  that  land  owner  and  farmer  are  different 
persons.  This,  of  course,  may  not  be  the  case.  The  land  owner  himself  may  work 
the  land.  But  such  a  hypothesis  does  not  alter  the  result.  The  fact  that,  under 
the  conditions  set  forth,  price  inevitably  rises  above  cost  of  production  brings  into 
existence  a  surplus.  This  surplus  is  first  received  by  the  farmer,  and  it  remains 
with  the  farmer  if  he  is  also  land  owner;  while,  if  he  is  only  a  tenant,  he  is  driven 
by  the  free  working  of  competition  to  turn  over  that  surplus  to  the  one  who  is  the 
owner. 


6l2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

more  than  equal  to  the  demand  at  some  price  above  cost.*  And,  with 
slight  change,  these  statements  will  explain  the  origin  of  rent  in  any 
possible  case. 

We  have  seen  how  rent  originates  in  the  very  simple,  but  very 
unreal,  case  furnished  by  our  first  hypothesis.  Let  us  now  change 
the  hypothesis  so  as  to  bring  it  a  step  nearer  to  the  facts  of  life.  To 
do  this,  we  will  suppose  that  the  wheat  land  of  our  island,  instead 
of  being  all  of  one  grade,  is  of  four  grades,  though  as  before  the  output 
of  each  acre  in  each  grade  is  absolutely  fixed.  Thus,  we  will  assume 
that  there  are  loo  acres  which  will  produce  each  30  bushels  at  a  cost 
per  bushel  of  30  cents,  200  acres  which  will  produce  each  a  little  under 
26  bushels  at  a  cost  per  bushel  of  35  cents,  300  acres  which  will  pro- 
duce each  22^  bushels  at  a  cost  per  bushel  of  40  cents,  and  400  acres 
which  will  produce  each  20  bushels  at  a  cost  of  45  cents  per  bushel. 
In  each  case,  greater  expenditure  will  not  increase  output  at  all, 
while  smaller  expenditure  will  produce  no  output. 

When,  now,  would  rent  appear,  under  these  new  conditions  ?  If 
the  demand  for  wheat  were  limited  to  2,000  bushels,  then,  as  in  the 
previous  case,  there  would  be  no  rent;  since  to  produce  that  much 
wheat  would  require  only  two-thirds  of  the  100  acres  of  best  land, 
leaving  the  other  third,  as  also  all  poorer  lands,  idle,  and  the 
competition  of  the  idle  33^  acres  of  best  land  would  shut  out  any^ 
charge  for  the  use  of  the  66f  acres  actually  under  cultivation.  In 
like  manner,  the  price  would  be,  as  before,  just  equal  to  cost,  30  cents. 
Manifestly  the  same  propositions  would  be  true,  were  demand  2,100 
bushels,  or  2,200,  or  2,  300,  or  anything  less  than  3000.  But  suppose, 
now,  that  the  demand  schedule  becomes  3,100  bushels  at  30  cents, 
3,000  at  31  cents,  2,900  at  32  cents,  and  so  on.  At  once  price  must 
rise  to  31  cents;  for  the  whole  output  which  farmers  can  afford  to 
raise  so  long  as  price  is  under  35  cents,  is  wanted  at  31  cents.  But 
a  price  of  3 1  cents  gives  a  surplus  over  cost  of  i  cent  per  bushel  or 
30  cents  per  acre  on  the  best  land;  and  this  surplus,  as  in  the  former 
case,  v/ill  be  driven  into  the  hands  of  land  owners  by  the  competition 
of  possible  tenants;  that  is,  rent  will  now  come  into  existence. 

What,  now,  is  the  explanation  of  rent  in  this  case  ?    Substantially 

•A  more  common  but  less  precise  statement  would  be  this:  The  ultimate 
cause  of  rent,  in  a  case  like  that  supposed,  would  be  found  in  that  fact  that  the 
demand  for  wheat  at  the  cost  price  exceeded  the  whole  possible  output,  or  the  whole 
possible  output  was  smaller  than  demand  at  the  cost  price.  This  method  of  putting 
such  cases  assumes — which  doubtless  is  commonly  true — that  a  demand  in  excess 
of  output  at  one  price  means  a  demand  at  some  higher  price  equal  to  output. 


RENT  613 

the  same  as  before.  The  immediate  cause  is  a  rising  of  price  above 
cost  of  production  on  the  rent-bearing  land.  But  the  cause  of  that 
rising  of  price,  i.e.,  the  more  ultimate  cause  of  rent,  is  the  fact  that  the 
demand  at  some  price  above  cost  is  at  least  equal  to  possible  output 
on  the  best  land,  or,  turned  about,  that  the  output  of  the  best  grade 
of  land  is  not  greater  than  the  demand  at  some  price  above  cost. 
In  short,  it  is  the  limited  stock  and  limited  capacity,  not  this  time 
of  all  land,  but  of  land  of  the  best  grade,  as  compared  with  the  demand 
for  wheat,  which  causes  rent.  Land  being  of  various  grades,  a  scarcity 
of  the  best  land  makes  itself  felt  in  raising  price  and  starting  rent 
even  though  land  as  a  whole  cannot  be  said  to  be  scarce.  In  such  a 
case,  the  existence  of  rent  might  be  said  to  depend  in  a  way  on  the 
fact  that  lands  were  of  different  grades.  But  the  particular  implica- 
tion (in  that  statement)  on  which  rent  depends  is  this,  that  not  all 
the  lands  are  of  the  best  grade,  rather  than  this,  that  there  are  inferior 
as  well  as  superior  grades. 

The  above  shows  how,  in  the  hypothetical  case  under  considera- 
tion, rent  would  come  into  existence.  But  there  is  another  phase  of 
the  matter  which  deserves  consideration.  Let  us  suppose  the  demand 
schedule  for  wheat  to  advance  by  successive  steps  till  it  reads  as  fol- 
lows: 3,000  wanted  at  36  cents,  3,100  at  35  cents,  3,200  at  34  cents, 
and  so  on.  What  will  now  happen  ?  At  first  sight  it  might  seem  that 
price  would  now  become  36  cents;  since  3,000  bushels,  the  whole 
product  of  the  best  land,  is  now  wanted  at  36  cents.  But  a  new  ele- 
ment has  come  in.  According  to  the  original  hypothesis,  there  are 
200  acres  which  can  furnish  each  26  bushels  of  wheat  at  a  cost  of 
35  cents.  But,  by  this  time,  price  will  have  reached  35  cents,  for 
3,100  bushels  are  wanted  at  that  price;  consequently  farmers  can 
profitably  work  the  35  cent  land  and  will  of  course  begin  to  do  so. 
But,  since  5,200  bushels  can  be  furnished  off  these  second  grade 
lands,  the  3,100  bushels  wanted  at  35  cents  can  easily  be  supplied 
at  this  price.  Price,  therefore,  will  stop  at  35  cents,  instead  of  going 
to  36.  Further,  this  would  be  the  case,  i.e.,  price  would  remain 
stationary  at  35  cents,  even  were  demand  to  increase  so  that  there 
were  wanted  at  35  cents  3,500  bushels  or  4,000  or  5,000  or  any  number 
short  of  3,000  plus  5,200,  i.e.,  8,200.  But,  if  price  remains  stationary 
at  35  cents  throughout  all  these  changes  in  demand,  then  obviously 
the  surplus  over  cost  will  also  remain  stationary,  and  therefore  rent 
also  will  remain  stationary.  In  short,  the  cultivation  of  the  inferior 
lands  acts  to  check  rent — the  existence  of  inferior  land  is  not  a 
condition  on  which  the  arising  of  rent  depends — as  is  often  said — 


6l4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

but  rather  a  condition  on  which  the  keeping  of  rent  within  bounds 
depends. 

In  the  hypothesis  which  has  just  been  considered,  we  had  already 
restored  one  of  those  two  important  facts  of  the  real  world  which,  as 
will  be  remembered,  were  purposely  dropped  out  of  our  first  hypothe- 
sis. Let  us  now  restore  the  second  of  those  two  facts.  Let  us  sup- 
pose that  the  possible  output  of  each  acre  of  land,  instead  of  being 
absolutely  fixed,  varies  in  some  degree  with  the  amount  of  expenditure. 
Let  us  suppose,  further,  that  with  an  expenditure  of  $9,  each  acre  of 
land  reaches  the  point  of  diminishing  returns.  Beyond  this,  increase 
in  expenditure  will  for  a  time  secure  an  increase  in  output  but  one 
less  than  proportionate  to  the  increase  in  expenditure.  Thus,  sup- 
pose that,  while  $9  spent  on  the  best  land  yields  30  bushels,  $12 
would  yield  38  bushels;  $15,  44  bushels;  and  $18,  47  bushels;  after 
which  no  increase  is  possible.  Similarly  for  the  second  grade  of 
land,  while  $9  spent  on  it  yields  26  bushels,  $12  would  yield  32 
bushels;  $15,  34  bushels;  and  $18,  38  bushels;  after  which  no 
increase  could  be  secured.  And  so  on  with  the  other  grades  of  land. 
Under  these  conditions,  as  a  little  computation  would  show,  when 
price  reached  37  cents,  output  could  be  increased  800  bushels  from  the 
best  land;  when  price  reached  50  cents,  output  could  be  increased 
600  bushels  from  first  grade  land  and  1^200  bushels  from  second  grade; 
when  price  reached  75  cents,  output  could  be  increased  800  bushels 
from  second  grade  land  and  1,200  from  third  grade  land;  and  so  on. 

What,  now,  will  be  the  effect  of  these  new  conditions?  Let  us 
suppose  the  demand  schedule  to  have  advanced  till  it  reads  as  follows: 
8,000  bushels  wanted  at  39  cents;  8,500,  at  38  cents;  9,000  at  37 
cents;  9,500,  at  36  cents;  and  so  on.  Under  our  former  hypothesis — 
that  the  productivity  of  each  grade  of  land  was  absolutely  fixed — this 
demand  schedule  combined  with  the  output  schedule  would  give  us 
a  price  of  38  cents.  It  could  not  be  above  38  cents;  since  this  would 
cut  demand  down  to  at  least  8,000,  while  8,200  at  least  could  be 
furnished  for  35  cents.  It  could  not  be  below  38  cents;  since  at  that 
figure  8,500  bushels  would  be  wanted  and  only  8,200  could  be 
furnished,  and  so  the  competition  of  the  unsuccessful  buyers  would 
hold  it  at  that  point.  But,  while  under  the  first  hypothesis  the  new 
demand  schedule  would  give  us  a  price  of  38  cents,  under  the  second 
hypothesis  it  would  give  a  price  of  only  37  cents.  For,  under  this 
second  hypothesis,  when  price  reaches  37  cents  we  can,  through  the 
more  intensive  cultivation  of  the  best  land,  increase  output  by  800 


RENT  615 

bushels,  making  a  possible  total  at  that  figure  of  9,000  bushels — 
3,800  from  the  best  land  and  5,200  from  the  second  best;  and  9,000 
bushels  just  satisfies  the  demand  at  37  cents  and  so  hinders  a  rise 
to  38  cents.  Thus,  the  new  hypothesis  has  hindered  the  price  from 
rising  as  high  as  it  would  have  risen  under  the  old.  But  anything 
which  hinders  price  from  rising  thereby  hinders  rent  from  rising. 
That  is,  the  more  intensive  cultivation  of  soils  already  in  use  checks 
the  rise  of  rent.  The  principle  that  even  after  the  stage  of  highest  net 
efificiency  has  been  reached  output  can  be  increased  though  at  increas- 
ing cost  per  unit,  furnishes  a  condition  under  which  rent  may  be 
checked.  In  other  words,  the  so-called  law  of  diminishing  returns — 
which  might  better  be  named  the  law  of  increasable  returns  at 
diminishing  rate — in  one  of  its  phases  furnishes  a  .possible  check  on 
the  growth  of  rent;  and  from  this  standpoint  takes  its  place  along 
with  the  inferior  soils  which,  as  we  saw  above,  play  a  similar  part. 

The  discussion  just  preceding  has  shoT\Ti  how  the  law  of  diminish- 
ing returns  acts  to  check  the  growth  of  rent.  We  can  hardly  leave  the 
matter  without  remarking  emphatically  that,  looked  at  in  another 
of  its  phases,  this  same  law  is  a  sine  qua  non  of  rent.  Because  the 
returns  from  the  same  piece  of  land  are  increasable,  therefore  a  check 
on  rent  is  possible.  But,  because  the  possible  increase  is  at  a  dimin- 
ishing rate,  therefore,  before  the  increase  which  checks  rent  can  take 
place,  price  must  rise  above  cost  on  the  old  plan  of  cultivation,  and 
it  is  this  rising  which  causes  rent.  If  output  could  be  increased 
indefinitely  without  any  faUing  off  in  the  rate,  there  could  never  be 
any  rent;  for  supply  would  always  keep  pace  with  demand  at  cost 
price,  i.e.,  without  any  rising  of  price  above  cost.  We  could  have 
rent,  were  returns  absolutely  fixed;  we  do  have  rent  with  returns 
fixed  by  an  elastic  Hmit,  i.e.,  increasable  but  at  a  diminishing  rate; 
but  we  could  not  have  rent,  were  returns  indefinitely  increasable 
without  any  falling  off  in  the  rate. 

We  have  set  forth  the  process  by  which  rent  would  come  into 
existence  under  each  of  three  different  hypotheses,  each  being  modi- 
fied so  as  to  bring  it  nearer  to  actual  conditions  than  its  predecessor. 
As  a  matter  of  fact,  even  in  its  third  form  that  hypothesis  would,  in 
many  respects,  show  not  a  few  differences  from  those  conditions.  One 
of  these  differences  gives  us  a  case  which  is  of  sufi&cient  importance  to 
deserve  special  consideration.  In  introducing  the  condition  of  different 
grades  of  land,  it  was  assumed  that  these  grades  varied  in  productivity 
by  considerable  intervals.  The  best  produced  30  bushels  per  acre;  the 
second  best,  26  bushels;  the  third,  22^  bushels,  and  so  on.     But  there 


6l6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

can  be  little  doubt  that,  in  the  actual  world,  lands  vary  in  productivity 
by  much  slighter  differences  than  these.  Still  keeping  as  near  as 
possible  to  our  original  figures,  the  best  land  jdelds,  let  us  say,  30 bushels 
per  acre;  the  second  grade,  29;  the  third,  28;  and  so  on.  (Very  likely 
even  these  differences  are  too  large.)  Does  this  new  condition  compel 
us  to  alter  our  explanation  of  rent  ?  Not  in  any  essential  feature.  To 
simplify  matters,  let  us  ignore  the  output  per  acre,  and  simply  assume 
that,  without  pushing  cultivation  beyond  the  point  of  highest  net 
efficiency,  wheat  can  be  raised  on  the  different  grades  according  to 
the  following  schedule:  on  the  best,  3,000  bushels  at  a  cost  of  30  cents 
per  bushel;  on  the  second  grade,  5,000  bushels  at  a  cost  of  31  cents; 
on  the  third  grade,  7,000  bushels  at  a  cost  of  32  cents  a  bushel;  and 
so  on — ^it  being  assumed  also  that  people  do  not  take  account  of 
differences  smaller  than  a  cent.  How,  now,  would  rent  come  into 
existence?  Our  previous  answers  fit  easily  enough.  As  soon  as 
demand  at  some  price  above  30  cents  equals  or  exceeds  3,000  bushels — 
the  output  from  the  best  land — ^price  will  rise  above  30  cents,  thus 
giving  a  surplus  over  cost  which  will  be  retained  by  the  farmer  if  he 
is  also  land  owner  but  which,  if  he  is  only  a  tenant,  will  be  driven  by 
competition  from  his  hands  into  those  of  the  land  owner.  But  what 
part  is  played  by  the  new  possibilities  of  production  at  31  cents, 
32  cents,  and  so  on  ?  Just  such  a  part  as  was  formerly  played  by  the 
possibility  of  production  at  35  cents.  Since  the  output  can  be 
increased  5,000  bushels  just  as  soon  as  a  price  of  31  cents  is  estabUshed, 
then,  although  the  demand  schedule  may  be  one  which  under  the 
former  hypothesis  would  have  raised  price  to  32  or  33  or  34  or  35 
cents  and  so  raised  rent  to  corresponding  heights,  price  may  now 
be  checked  at  31  cents,  and  so  rent  kept  at  i  cent  a  bushel  or  30  cents 
an  acre.  Thus,  suppose  the  demand  schedule  to  be:  3,500  bushels 
at  35  cents;  4,000  at  34  cents;  4,500  at  33  cents;  5,000  at  32  cents; 
5,500  at  31  cents;  and  so  on.  Under  our  former  hypothesis,  price 
would  promptly  rise  to  35  cents,  giving  a  rent  on  the  best  land  of 
$1 .  50  per  acre.  But,  under  the  new  hypothesis,  price  could  not  rise 
above  31  cents,  since  at  that  price  8,000  bushels  can  be  furnished  and 
only  5,500  are  wanted;  and  rent  could,  in  consequence,  reach  only  30 
cents  per  acre.' 

'  The  conspicuous  difference  between  the  earlier  case  and  the  one  just  con- 
sidered is  to  be  found  in  the  fact  that,  in  the  latter,  cost  of  production  plays  a 
part  in  determining  price  and  so  in  determining  rent,  not  merely  at  special 
stages,  as  in  the  former  case,  but  all  the  time.  Thus,  under  the  former  hypothesis, 
whenever  costs  on  the  first  and  second  grade  lands  are  respectively  30  and  35 


RENT  617 

The  gist  of  the  above  discussion  may  be  set  forth  in  the  following 
propositions,  (i)  Rent  in  general  comes  into  existence  when  and 
because  the  demand  for  agricultural  products  at  some  price  higher 
than  cost  on  the  best  land — said  land  being  cultivated  up  to  the  point 
of  highest  net  eflBciency — equals  or  exceeds  the  output  of  said  land 
so  cultivated.  (2)  Rent  on  any  particular  grade  of  land  comes  into 
existence  when  the  demand  for  agricultural  products  at  some  price 
higher  than  cost  on  the  grade  of  land  under  consideration,  equals  or  ex- 
ceeds the  output  on  all  land  having  a  cost  which  is  smaller  than  said 
price,  the  lands  in  all  cases  being  cultivated  to  the  point  of  highest 
net  efficiency.  (3)  The  detailed  process  whereby  rent  comes  into  ex- 
istence is  as  follows:  demand  at  some  price  higher  than  cost  becomes 
at  least  as  great  as  possible  output  of  best  land  cultivated  to  point  of 
diminishing  returns;  this  causes  price  to  rise  above  cost;  this  gives 
to  the  farmer  a  surplus  over  ordinary  returns;  the  existence  of  this 
surplus  leads  to  the  competition  of  possible  tenants  in  trying  to 
secure  the  use  of  the  land  by  paying  a  price  therefor;  and  this  competi- 
tion goes  on  till  the  whole  surplus  is  turned  over  to  the  land  owner  as 
rent.  (4)  Bringing  into  cultivation  inferior  soils  tends  to  check  the 
rise  of  rent.  (5)  Cultivating  more  intensively  soils  already  in  use 
tends  to  check  the  rise  of  rent. 

179.    RENT  DIAGRAMS 

The  accompanying  diagrams  are  intended  to  illustrate  the  rents 
due  to  cultivating,  in  a  given  community,  different  pieces  of  land 
which  offer  unequal  advantages  to  the  cultivator,  through  differences 
of  fertility,  of  location,  or  of  both. 

In  Diagram  I  the  case  is  presented  from  the  viewpoint  of  increasing 
cost  of  production.  In  the  plane  figure  YOXB,  units  of  product  from 
the  best  piece  of  land  are  measured  along  OX.  OA  represents  the 
CQst  of  the  first  unit  produced;   XB  represents  the  cost  of  the  final 

cents,  after  price  has  reached  31  cents  and  before  it  has  reached  34  cents,  it  is 
temporarily  emancipated  from  the  influence  of  cost  of  production  altogether. 
During  that  time,  price  is  solely  a  question  of  the  marginal  utility  of  the  possible 
output  of  the  best  land;  and  the  precise  amount  of  such  marginal  utility  is  not  at 
all  affected  by  cost.  But,  when,  as  in  the  later  hypothesis,  the  second  grade  land 
can  furnish  wheat  at  31  cents,  third  grade  land  at  32  cents,  and  so  on,  then  marginal 
utility  itself  can  be  determined  only  as  marginal  cost  is  also  determined,  and  so, 
of  course,  price  can  be  determined  only  as  marginal  cost  is  determined.  In  fact 
during  much  of  this  interval  price  might  temporarily  ignore  marginal  utility 
altogether  and  follow  marginal  cost  only. 


6i8 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


or  marginal  unit,  and  each  point  on  the  ascending  curve  AB  repre- 
sents, by  its  height  above  OX,  the  cost  of  some  intermediate  unit  of 
product.  The  area  OXBA  shows  the  total  cost  of  the  product  on 
this  piece  of  land;  the  area  OXBY  indicates  the  total  selling-price  of 
this  product,  and  the  area  A  BY  indicates  the  amount  of  rent. 

Similar  explanations  apply  to  the  analogous  figures  Y'O'X'B'  and 
Y"0"X"B".  O'A '  is  greater  than  OA ,  and  0"A  "  is  greater  than  O'A ', 
indicating  that  on  inferior  lands  the  initial  cost  of  production  is  greater 
than  on  the  best  land;    but  the  marginal  costs  X'B'  and  X"B"  are 


Diagram  I 


equal  to  the  marginal  cost  XB  on  the  best  land.  The  line  DC  may  be 
interpreted  as  the  extreme  or  limiting  form  of  a  figure  like  YOXB,  and 
if  so  interpreted  shows  the  case  of  no-rent  land  on  which  but  one  imit 
is  produced,  and  on  which  initial  cost  coincides  with  marginal  cost. 

Diagram  I  as  a  whole  may  be  regarded  as  a  solid  figure  made  up 
of  an  indefinite  number  of  figures  like  YOXB,  Y'O'X'B',  etc.,  packed 
side  by  side,  each  corresponding  to  a  separate  piece  of  the  land  under 
consideration.  Then  the  constant  altitude  of  the  line  CB  above  the 
line  DX  indicates  the  constant  marginal  cost  on  all  grades  of  land. 
The  varying  altitude  of  the  line  AC  above  the  line  OD  shows  the  difi'er- 
ent  costs  of  the  initial  units  of  product  raised  on  lands  of  different 


RENT 


619 


advantages.  The  volume  of  the  solid  figure  DOXBCY  represents  the 
total  price  of  the  product  of  all  the  pieces  of  land.  Of  this  total,  the 
porUon  represented  by  DOXBCA  is  cost  of  production,  and  the 
portion  represented  by  CABY  is  total  rent. 

Diagram  II  presents  the  same  general  subject  from  the  view- 
point of  diminishing  returns.  Here,  in  the  plane  figure  YOXB,  units 
of  labor  and  capital  applied  to  the  best  piece  of  land  are  measured 
along  OX.  OY  represents  the  return  to  the  first  dose  of  labor  and 
capital;  XB  represents  the  return  to  the  marginal  dose,  and  the  de- 
scending curve  YB  represents  the  phenomenon  of  diminishing  returns 
to  successive  intermediate  doses.     The  area  YOXB  shows  the  total 


Diagram  II 


product  of  this  piece  of  land;  the  area  AOXB  shows  what  would 
have  been  the  product  if  no  unit  of  labor  and  capital  had  yielded  more 
than  did  the  marginal  dose.  The  difiference,  YAB,  indicates  the 
amount  of  rent. 

Similar  explanations  apply  to  the  analogous  figures  Y'O'X'B'  and 
Y"0"X"B".  Y'O'  is  less  than  YO,  and  Y"0"  is  less  than  Y'0\ 
indicating  that  on  inferior  lands  the  initial  return  is  less  than  on  the 
best  land;  but  the  return  to  the  marginal  dose  of  labor  and  capital 
{XB,  X'B',  X"B",  and,  in  the  limiting  case,  DC)  is  the  same  for  any 
grade  of  land.  , 

In  Diagram  II  as  a  whole,  the  constant  altitude  of  the  line  BC 
above  the  line  XD  indicates  the  constant  marginal  productivity  of 
labor  and  capital  on  all  kinds  of  land.    The  varying  altitude  of  the  line 


620  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

YC  above  the  line  OD  shows  the  different  degrees  of  initial  produc- 
tivity of  lands  of  different  quality.  The  volume  of  the  solid  figure 
OXDCYB  represents  the  total  product  of  all  the  pieces  of  land.  Of 
this  total,  an  amount  represented  by  the  volume  OX  DC  A  B  would  have 
been  produced  if  no  labor  and  capital  had  yielded  more  than  did  the 
marginal  doses  on  the  several  pieces  of  land.  The  difference,  repre- 
sented by  the  volume  ABCY,  is  total  rent. 

Note. — In  strictness,  if  Diagrams  I  and  II  refer  to  the  same  set  of  conditions, 
and  if  the  curves  AB,  A'B',  and  A"B"  of  Diagram  I  are  concave  to  the  base  of  the 
figure,  as  drawn,  the  curves  YB,  Y'B',  and  Y"B"  of  Diagram  II  should  be  convex  to 
the  base.  But  in  drawing  the  diagrams  it  has  seemed  best,  despite  the  inconsist- 
ency, to  use  in  each  the  more  familiar  concave  curve,  as  it  is  employed  in  most 
texts. — Editors. 


1 80.    SOME  FACTORS  AFFECTING  LAND  VALUES' 

The  total  value  of  a  city's  site  is  broadly  based  on  population 
and  wealth,  the  physical  city  being  the  reflex  of  the  total  social 
activities  of  its  inhabitants.  Whatever  the  type  of  city,  growth 
consists  of  movement  away  from  the  point  of  origin,  and  is  of  two 
kinds;  central,  or  in  all  directions,  and  axial,  or  along  the  water- 
courses, railroads  and  turnpikes  which  form  the  framework  of  cities. 
Modem  rapid  transit  stimulates  axial  growth,  producing  star-shaped 
cities,  whose  modification  in  shape  comes  chiefly  from  topographical 
faults. 

The  factors  distributing  values  over  the  city's  area  by  attracting 
or  repulsing  various  utilities,  are,  in  the  case  of  residences,  absence 
of  nuisances,  good  approach,  favorable  transportation  facilities, 
moderate  elevation,  and  parks;  in  the  case  of  retail  shops,  passing 
street  trafl&c,  with  a  tendency  towards  proximity  to  their  customers' 
residences;  in  the  case  of  retail  wholesalers  and  light  manufacturing, 
proximity  to  the  retail  stores  which  are  their  customers;  in  the  case 
of  heavy  wholesaling  or  manufacturing,  proximity  to  transportation; 
and  in  the  case  of  public  or  semi-public  buildings,  for  historical 
reasons,  proximity  to  the  old  business  center;  the  land  that  is  finally 
left  being  filled  in  with  mingled  cheap  utilities,  parasites  of  the  stronger 
utilities,  which  give  a  low  earning  power  to  land  otherwise  valueless. 

'  Adapted  from  Richard  M.  Hurd,  Principles  of  City  Land  Values,  passim 
(The  Record  and  Guide,  1903),  and  from  the  article  by  the  same  author  in  the 
Yale  Review  for  August,  1902. 


RENT  621 

The  basis  of  residence  values  is  social  and  not  economic — even 
though  the  land  goes  to  the  highest  bidder — the  rich  selecting  the 
locations  which  please  them,  those  of  moderate  means  living  as  near 
by  as  possible,  and  so  on  down  the  scale  of  wealth,  the  poorest  work- 
men taking  the  final  leavings,  either  adjacent  to  such  nuisances  as 
factories,  railroads,  docks,  etc.,  or  far  out  of  the  city.     Certain 
features  appear  to  attract  the  wealthy  in  selecting  their  residence 
district,  among  these  being  nearness  to  parks,  a  good  approach  from 
the  business  center,  not  too  near  nor  yet  too  far,  a  moderate  elevation 
if  obtainable,  favorable  transportation  facilities,  despite  the  fact  that 
the  rich  ride  in  their  own  carriages  and  automobiles,  and  above  all 
absence  of  nuisances.    Having  selected  a  district  the  wealthy  make 
it  their  own  by  erecting  handsome  residences,  making  good  street 
improvements,  restricting  against  nuisances,  and  finally  and  of  chief 
importance,  living  there  themselves,  the  value  of  residence  land  vary- 
ing directly  according  to  the  social  standing  of  its  occupants.     The 
main  consideration  in  the  individual  selection  of  a  residence  location 
is  the  desire  to  live  among  one's  friends  or  among  those  whom  one 
desires  to  have  for  friends;   for  which  reason  there  will  be  as  many 
residence  neighborhoods  in  a  city  as  there  are  social  strata.    Ip 
"securing  a  home  in  a  good  residence  section,  a  man  secures  safe  • 
healthy,  and  attractive  conditions  for  his  family  to  live  under,  and 
in  the  smaller  cities,  desirable  social  life,  these  social  considerations 
explaining  the  strong  pressure  in  all  cities  toward  the  best  residence 
sections.    The  contrast  should  be  noted  that  business  property  is 
selected  by  the  man  from  an  economic  standpoint,  and  residence 
property  by  the  woman  from  a  social  standpoint.     Social  growth 
and  pressure  is  upward  from  class  to  class,  all  ranks  being  continually 
recruited  from  below — as  well  as  dropping  members  from  time  to 
time — and  the  ultimate  aim  in  residence  location  is  to  be  as  close  as 
possible  to  those  of  the  highest  social  position. 

Where  residences  contain  more  than  one  tenant,  whether  tene- 
ments, flats,  apartments  or  hotels,  the  basis  of  value  is  economic 
and  conforms  closely  to  the  principles  governing  business  property. 
The  hotels  of  various  classes  seek  locations  similar  to  the  retail  stores 
of  the  same  classes  on  convenient  traffic  streets  which  advertise  them. 
The  highest-class  apartment  hotels  seek  locations  on  or  near  such  traf- 
fic streets  as  run  through  or  near  the  fashionable  districts,  the  rents 
being  dependent  both  upon  fashion  ai^  on  the  character  and  service 
of  the  building.     Below  this  grade  the  various  classes  of  flats  seek 


62  2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

locations  for  the  convenience  of  their  tenants,  tending  to  draw  nearer 
and  nearer  to  their  tenants'  places  of  business,  until  finally  we  reach 
tenements  crowded  among  the  factories  where  their  occupants  work. 

In  modem  cities  the  main  currents  of  business  men's  travel 
are  carried  by  street  railroads,  so  that  the  travel  consists  of  short 
trips  on  foot  converging  to  the  street  railroads,  a  long  trip  in  the  cars 
to  the  business  center,  and  there  short  trips  on  foot  again.  In  some 
cities  where  there  are  hills  between  the  business  and  residence  sections, 
the  currents  of  foot  travel  follow  a  zigzag  course  up  and  down  the 
hill,  it  being  easier  to  turn  corners  than  encounter  grades.  A  varia- 
tion may  occur  in  the  return  trip  where  men  stop  at  clubs,  cafes,  or 
hotel  lobbies,  the  location  of  these  favorite  haunts  causing  a  different 
route  to  be  taken,  with  some  resulting  influence  on  values. 

Within  the  business  districts  occur  the  continual  interchange 
of  visits,  by  means  of  which  the  business  of  the  city  is  accomplished. 
Here,  although  the  trips  are  short,  the  necessity  for  saving  time  leads 
to  the  gathering  together  of  the  various  forms  of  business  in  special 
districts.  In  large  cities  the  daily  trips  of  workmen  are  made  chiefly 
on  foot  and  are  widely  diffused  throughout  the  tenement  districts, 
with  small  effect  except  that  certain  more  convenient  streets  attract 
cheap  shops. 

The  daily  trips  of  women  are  made  either  for  shopping,  calling, 
or  driving.  Here,  as  in  men's  trips,  the  travel  consists  of  short  trips 
on  foot  to  the  street  car  lines,  which  carry  the  concentrated  travel 
to  the  largest  shops,  where  the  cars  are  left  and  the  women  walk  to 
the  other  shops.  For  the  same  reason  of  convenience,  women's  shops 
are  crowded  together  in  order  to  save  time  in  going  among  them. 

Transfer  points,  owing  to  concentration  of  daily  streams  of 
people  and  consequent  opportunity  for  shops,  are  strategic  points 
in  a  city's  area,  creating  business  subcenters,  whose  prospects  of 
increasing  values  are  limited  only  by  the  number  and  quality  of  the 
people  likely  to  utilize  them.  As  examples,  note  the  marked  effect 
of  transfers  in  New  York  at  Broadway  and  34th  Street,  Madison 
Avenue  and  59th  Street,  Lexington  Avenue  and  59th  Street;  also 
in  New  Haven  at  Chapel  and  Church  streets;  in  Denver  at  15th  and 
Lawrence  streets,  and  the  many  transfer  points  in  the  outlying 
districts  of  Chicago. 

Bridges,  ferries',  and  tunnels,  which  serve  as  additional  outlets 
to  a  city,  co-operate  with  ling  distance  transportation  facilities, 
and  any  change  in  their  location  or  any  competition  of  new  bridges 


RENT  623 

or  tunnels  by  changing  traffic  routes  cause  marked  shifting  of  values. 
Thus  the  construction  of  the  Brooklyn  Bridge  by  diverting  traffic 
from  the  old  Fulton  Street  ferry,  and  throwing  it  half  a  mile  back 
from  the  river  on  either  side,  removed  millions  of  dollars  of  value 
from  the  streets  leading  to  the  ferries,  especially  in  Brooklyn. 

Where  a  railroad  runs  through  a  business  section  at  grade,  it 
limits  communication  between  the  divided  sections  and  tends  to 
concentrate  business  on  one  side  of  the  line.     Where  a  railroad  in  a 
business  section  is  carried  below  or  above  grade,  its  effect  is  minimized. 
In  a  poor  residence  section  a  railroad  has  but  little  effect,  but  in  a 
high  class  residence  section  it  forms  a  nuisance  which  good  residences 
shun.    Added  to  the  noise  and  cinders  of  passing  trains  is  the  fact 
that  the  railroad  attracts  factories  and  warehouses,  which  are  also 
nuisances  in  a  residence  district.     In  some  instances  the  railroad 
travels  along  the  line  of  a  small  creek  or  gully  within  the  city,  which 
has  already  kept  land  values  down,  so  that  the  railroad  has  but 
little  added  effect,  as  with  the  greater  part  of  the  Belt  Line  in  Kansas 
City.     If  the  railroad  is  in  a  deep  cut,  its  limiting  effect  on  good 
residences  is  diminished,  as  in  Chattanooga  and  St.  Paul.     In  some 
cities  demand  for  land  in  the  good  residence  district  is  so  great  that 
the  residence  district  is  projected  beyond  the  encircling  railroad  with 
little  fall  in  values,  as  in  Louisville  and  Richmond,  where  handsome 
residences  are  built  adjacent  to  the  railroad.     In  New  York,  the 
N.Y.  Central  R.R.  on  Park  Avenue,  between  42d  and  s6th  streets, 
holds  the  high-class  residences  on  the  west  side  of  the  track,  the  east 
side  of  the  track  being  ruined  by  absence  of  approach,  the  only  com- 
munication being  by  the  elevated  foot  bridges.     From  56th  Street 
north  the  tracks  enter  the  tunnel  and  their  effect  is  lessened,  the  only 
objection  being  the  vent  holes  in  Park  Avenue.     In  all  cities  railroads 
detach  great  slices  of  city  area,  in  which  they  alter  utilizations  and 
values  much  as  important  water  courses  do. 

The  display  of  goods  is  vital  for  shops,  and  in  order  to  display 
goods  shade  is  necessary;  hence  the  side  of  the  street  which  is  shady 
during  the  part  of  the  day  in  which  women  shop  is  normally  worth 
from  20  per  cent  to  40  per  cent  and  occasionally  100  per  cent  more 
than  the  sunny  side  of  the  street.  The  west  side  of  streets  running 
north  and  south,  and  the  south  side  of  streets  running  east  and  west, 
are  shady  the  greater  part  of  the  year  from  about  12  or  i  o'clock  on, 
permitting  a  display  of  goods  without  fear  of  fading,  and  rendering 


624  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  sidewalk,  agreeable.  The  greater  part  of  the  purchasing  in  the 
large  shops  is  done  by  women  of  the  micljdle  classes,  whose  household 
duties  prevent  them  from  reaching  the  shops  until  after  n  o'clock. 
The  busiest  shopping  hours  are  from  ii  o'clock  to  4  o'clock,  many 
women  taking  lunch  either  in  the  department  stores  or  in  restaurants 
nearby.  The  women  of  wealth  shop  usually  in  the  morning  between 
II  and  2  o'clock,  so  that  even  in  their  case  the  west  or  south  side  of 
the  street  has  some  advantage  of  shade.  In  southern  cities  where 
shade  is  even  more  important,  the  relative  value  of  the  four  corners 
of  two  intersecting  business  streets  is  well  defined,  the  southwest 
comer  being  the  most  valuable,  the  southeast  next,  the  northwest 
next,  and  finally  the  northeast  corner.  This  refers  only  to  retail 
shopping  fronts,  the  corners  having  a  different  order  of  preference 
if  desired  for  other  purposes,  such  as  hotels  or  ofl5ce  buildings.  It  is 
said  that  in  such  northern  latitudes  as  those  of  St.  Petersburg  and 
Montreal  the  sunny  side  of  the  street  is  more  valuable  than  the  shady 
side,  since  it  attracts  the  travel  in  the  long  winters.  In  New  York 
some  difference  can  be  noted  in  the  tides  of  foot  travel  according  to 
the  time  of  year,  but  since  for  eight  or  nine  months  of  the  year  the 
climate  is  mild,  the  shops  become  established  on  the  shady  side  of 
the  street  and  whatever  travel  in  winter  changes  to  the  sunny  side 
is  not  sufficient  to  draw  them  over. 

Salt  Lake  City  (population  53,531)  is  located  where  the  Mormon 
trail  through  Emigration  Pass  reached  the  valley  floor  of  the  Great 
Salt  Lake,  and  was  laid  out  to  the  east  of  the  river  Jordan.  The 
first  dwellings  were  erected  on  the  block  bounded  by  Third  and 
Fourth  streets  south,  and  Second  and  Third  streets  west,  but  the 
first  store  was  erected  at  the  intersection  of  Main  Street  and  First 
South,  this  corner  being  now  the  second  in  value  in  the  city.  The 
Mormon  Temple  was  the  center  around  which  the  early  life  of  the 
city  revolved,  and  probably  the  reason  that  Main  Street  has  always 
been  the  principal  street  is  because  it  ran  from  the  city  to  the  temple 
and  to  Brigham  Young's  tithing  yard  on  the  adjacent  block. 

The  chief  peculiarity  of  the  original  plat  is  the  size  of  the  blocks, 
which  are  660  feet  square,  as  compared  with  normal  blocks  of  about 
300  feet  square.  This  results  in  one-fourth  as  many  corners  in  Salt 
Lake  City  as  in  the  normal  city,  so  that  the  two  good  intersections, 
those  of  Main  Street  with  South  First  and  South  Second  streets, 
have  an  abnormal  value  reaching  $1,800  per  front  foot.    The  further 


RENT 


625 


results  are  to  concentrate  business,  on  account  of  the  small  number 
of  streets  leading  away  from  the  center,  and  to  remove  almost  all 
the  value  from  a  tract  400  feet  square  at  the  center  of  each  block, 
since  a  depth  of  only  100  to  120  feet  can  be  utilized.  Thus  we  find 
in  a  distance  of  300  feet  a  drop  from  $1,800  to  $75  a  foot,  owing  to 
the  non-accessibiUty  of  the  interior  locations. 


Business  Section,  Salt  Lake  City,  Utah 

(The  figures  in  this  and  the  following  diagram  indicate  the 

value  of  corners,  per  front  foot) 

Atlanta  (population  89,872)  furnishes  one  of  the  few  examples 
of  an  inland  city  whose  site  is  not  intersected  by  a  water  course. 
In  its  origin  and  growth  it  has  been  purely  a  railroad  town,  the 
Union  Depot  being  practically  the  starting-point  of  the  city.  Two 
main  turnpikes  were  laid  out,  Marietta  and  Decatur  streets  east 
and  west.  Peachtree  and  Whitehall  streets  north  and  south,  whose 


626 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


intersection  has  only  recently  acquired  the  highest  values  in  the  city. 
The  bulk  of  the  population  first  located  south  of  the  railroad  tracks, 
possibly  owing  to  the  location  there  of  the  state  capitol,  county 
courthouse,  and  city  hall,  and  Whitehall  Street,  between  Mitchell 
and  Alabama,  still  remains  the  principal  women's  shopping  street. 
The  development  of  Peachtree  Street  as  the  one  fashionable  street 
of  the  city,  drawing  theaters,  clubs,  hotels,  and  office  buildings  after 


■MinuiA  -Wim 


Business  Section,  Atlanta,  Ga. 


it,  has  at  last  moved  the  point  of  highest  values  from  south  of  the 
railroad  tracks  to  north  of  them.  Residence  values  are  high,  owing 
partly  to  the  monopoly  of  fashion  held  by  Peachtree  Street,  where 
values  vary  from  $200  to  $100.  The  better  streets  off  Peachtree 
Street,  such  as  West  Peachtree,  Forest  Avenue,  Ponce  de  Leon, 
North  Avenue,  etc.,  show  values  running  from  $80  to  $40;  the  wide 
differences  in  values  for  similar  land  being  due  not  only  to  topography 
but  also  to  variations  in  the  scale  of  development. 


RENT  627 

181.    RAILROADS  AND  LAND  VALUES' 

The  actual  increase  in  the  value  of  lands,  due  to  the  construction 
of  railroads,  is  controlled  by  so  many  circumstances,  that  an  accurate 
estimate  can  only  be  approximated,  and  must  in  most  cases  fall  far 
short  of  the  fact.  Not  only  are  cultivated  lands,  and  city  and  village 
lots,  lying  immediately  upon  the  route  affected,  but  the  real  estate  in 
cities,  hundreds  and  thousands  of  miles  distant.  The  raihoads  of  Ohio 
ex^t  as  much  influence  in  advancing  the  prices  of  real  property  in  the 
city  of  New  York,  as  do  the  roads  lying  within  that  state.  This  fact 
will  show  how  very  imperfect  every  estimate  must  be.  But  taking 
only  the  farming  lands  of  the  particular  district  traversed  by  a  railroad, 
where  the  influence  of  such  a  work  can  be  more  directly  seen,  there  is 
no  doubt  that  in  such  case  the  increased  value  is  many  times  greater 
than  the  cost  of  the  road.  It  is  estimated  by  the  intelligent  president 
of  the  Nashville  and  Chattanooga  R.R.,  that  the  increased  value  of 
a  belt  of  land  ten  miles  wide,  lying  upon  each  side  of  its  line,  is  equal 
to  at  least  $7 .  50  per  acre,  or  $96,000  for  every  mile  of  road,  which 
will  cost  only  about  $20,000  per  mile.  That  work  has  aheady  created 
a  value  in  its  influence  upon  real  property  alone,  equal  to  about  five 
times  its  cost.  What  is  true  of  the  Nashville  and  Chattanooga  road, 
is  equally  so,  probably,  of  the  average  of  roads  throughout  the  country. 
It  is  believed  that  the  constriiction  of  the  three  thousand  miles  of 
railroad  of  Ohio  wiU  add  to  the  value  of  the  landed  property  in  the 
state  at  least  five  times  the  cost  of  the  roads,  assuming  this  to  be 
$60,000,000.  In  addition  to  the  very  rapid  advance  in  the  price  of 
farming  lands,  the  roads  of  Ohio  are  stimulating  the  growth  of  her 
cities  with  extraordina,ry  rapidity,  so  that  there  is  much  greater 
probability  that  the  above  estimate  will  be  exceeded,  than  not  reached, 
by  the  actual  fact.  We  are  not  left  to  estimate  in  this  matter.  In 
the  case  of  the  state  of  Massachusetts,  what  is  conjecture  in  regard 
to  the  new  states,  has  with  her  become  a  matter  of  history.  The 
valuation  of  that  state  went  up,  from  1840  to  1850,  from  $290,000,000 
to  $580,000,000 — an  immense  increase,  and  by  far  the  greater  part 
of  it  due  to  the  numerous  railroads  she  has  constructed.  This 
increase  is  in  a  much  greater  ratio  to  the  cost  of  her  roads,  than  has 
been  estimated  of  those  of  Ohio. 

*  From  I.  D.  Andrews,  Report  on  the  Trade  and  Commerce  of  the  British  North 
American  Colonies  (1853),  pp.  383-84.  House  Executive  Document  No.  136, 
3  2d  Congress,  2d  Session. 


628  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

We  have  considered  the  effect  of  railroads  in  increasing  the  value 
of  property  in  reference  only  to  lands  devoted  to  agriculture;  but 
such  results  do  not  by  any  means  give  the  most  forcible  illustration 
of  their  use.  An  acre  of  farming  land  can  at  most  be  made  to  yield 
only  a  small  annual  income.  An  acre  of  coal  or  iron  lands,  on  the 
other  hand,  may  produce  a  thousand-fold  more  in  value  than  the 
former.  These  deposits  may  be  entirely  valueless  without  a  rail- 
road. With  one,  every  ton  of  ore  they  contain  is  worth  one,  t^^o, 
three,  or  four  dollars,  as  the  case  may  be.  Take  for  example  the  coal- 
fields of  Pennsylvania.  The  value  of  the  coal  sent  yearly  from  them, 
in  all  the  agencies  it  is  called  upon  to  perform,  is  beyond  all  calcula- 
tion. Upon  this  article  are  based  our  manufacturing  establishments, 
and  our  government  and  merchant  steamships,  representing  values 
in  their  various  relations  and  ramifications,  equal  to  thousands  of 
millions  of  dollars.  Without  coal  it  is  impossible  to  conceive  the 
spectacle  that  we  should  have  presented  as  a  people,  so  entirely 
different  would  it  have'  been  from  our  present  condition.  Neither 
our  commercial  nor  our  manufacturing,  nor,  consequently,  our 
agricultural  interests,  could  have  borne  any  relation  whatever  to 
their  present  enormous  magnitude.  Yet  all  this  result  has  been 
achieved  by  a  few  railroads  and  canals  in  Pennsylvania,  which  have 
not  cost  over  $50,000,000.  With  these  works,  coal  can  be  brought 
into  the  New  York  market  for  about  $3.50  per  ton;  without  them, 
it  could  not  have  been  made  available  either  for  ordinary  fuel  or.  as 
a  motive  power.  So  small,  comparatively,  are  the  agencies  by^  which 
such  immense  results  have  been  effected,  that  the  former  are  com- 
pletely lost  sight  of  in  the  magnitude  of  the  latter. 

182.     LAND  VALUATION* 

Urban  economic  rent  is  ascertained  by  deducting  from  the  gross 
rent  of  land  and  building,  first,  all  charges  for  services,  such  as  heat, 
light,  elevators,  janitors,  agents'  commission  for  collecting  rents,  etc.; 
second,  taxes,  insurance,  and  repairs,  and,  finally,  interest  on  the 
capital  invested  in  the  building.  This  interest  on  the  cost  of  the 
building  must  exceed  the  average  interest  rate  by  an  amount  equal 
to  the  annual  depreciation  of  the  building,  thus  providing  a  sinking 
fund  sufficient  to  replace  the  building  at  the  end  of  its  life.     To  make 

'  Adapted  from  R.  M.  ITurd,  Principles  of  City  Land  Values,  pp.  1-2;   124-32; 
148-36.     The  Record  and  Guide,  1903. 


RENT  629 

a  correct  showing  the  building  must  be  suited  to  the  location  and 
managed  with  ordinary  ability,  or  the  apparent  economic  rent  will 
have  little  or  no  bearing  on  the  value  of  the  land. 

The  rate  of  capitalization,  turning  income  into  value,  is  based 
on  the  average  interest  rates  of  all  investments  and  fluctuates  with 
them,  although  within  closer  limits  and  more  slowly.  Wide  dif- 
ferences occur  in  the  rates  of  capitalization  of  rents  from  land  of 
different  uses  in  the  same  city,  and  smaller  differences  from  land 
having  the  same  use  in  different  cities.  Where  a  locality  is  advancing 
in  value,  capitalization  rates  are  low,  where  stationary  they  are 
normal,  and  where  declining  they  run  very  high.  After  the  vital 
factor  of  prospective  increase  or  decrease  of  value,  the  lesser  factors 
are  stability  of  rents,  ease  of  convertibility — ^in  part  by  mortgaging 
or  in  whole  by  selling — and  character  of  utilization,  as  involving  the 
rates  of  depreciation  of  different  classes  of  buildings.  In  general, 
the  larger  the  city  and  the  higher  the  class  of  property,  the  greater 
the  stability  of  rents,  and  ease  of  convertibility,  and  the  lower  the 
rate  of  capitalization.  Differences  in  rent  are  plainly  apparent,  but 
differences  in  rates  of  capitalization  are  frequently  overlooked, 
although  a  very  large  proportion  of  value  in  urban  land  comes  from 
a  low  rate  of  capitalization.  To  illustrate;  of  two  pieces  of  land 
yielding  an  economic  rent  of  $10,000  annually,  one  well  located  and 
improved  with  office  building  or  retail  shop  might  sell,  excluding 
the  building,  on  a  4  per  cent  basis,  or  for  $250,000;  while  the 
other  covered  with  cheap  tenements,  might  sell,  excluding  the 
buildings,  on  a  10  per  cent  basis,  or  for  $100,000.  The  rate  of 
capitalization  is  ascertained  by  figuring  backwards,  i.e.,  dividing 
average  prices  paid  for  similar  land  by  the  net  income,  which 
shows  the  interest  rate  which  the  community  is  satisfied  to  receive 
on  such  investments. 

Taking  as  gross  rents  the  amounts  actually  received  and  not  the 
full  rental  value,  from  which  an  allowance  for  vacancies  must  be  made, 
we  may  note  first  the  great  difference  in  the  proportion  of  operating 
expenses  according  to  the  class  of  property,  this  varying  from  10  per 
cent  for  one  or  two  story  brick  store  buildings,  up  to  50  per  cent  for 
office  buildings  or  apartment  houses. 

Explaining  this  difference  is  the  fact  that  in  office  buildings  and 
apartment  houses,  from  20  per  cent  to  25  per  cent  of  the  rent  repre- 
sents the  payment  for  services,  such  as  light,  heat,  elevator,  janitors, 
cleaning,  etc.    If  from  gross  rentals  all  service  charges  are  deducted, 


630  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  other  charges,   taxes,   insurance,   repairs   and   rent  collecting, 
approximate  in  percentage  quite  closely  in  all  classes  of  property. 

Average  taxes  vary  somewhat  in  different  cities.  Taxes  on 
individual  properties  in  the  same  city  vary  more  sharply  owing 
to  irregular  assessing  by  tax  officials.  Figuring  the  average  of  a 
large  number  of  American  cities,  taxes  range  from  i|  per  cent  to 
1^  per  cent  of  actual  value,  the  chief  exceptions  being  in  Washington, 
where  taxes  amount  to  6-10  per  cent  (the  U.S.  government  paying 
half  the  taxes),  and  in  San  Francisco,  where  taxes  amount  to  8-10 
per  cent  (the  city  having  no  bonded  debt).  The  chief  errors  of 
assessors  come  from  their  overestimate  of  external  appearances  and 
from  the  habit  of  following  former  assessment  rolls,  so  that  quite 
uniformly  property  which  has  been  valuable  but  which  is  deteriorat- 
ing is  assessed  higher  than  property  in  the  line  of  growth  and  yielding 
larger  rents. 

The  cost  of  insurance  is  usually  so  slight  that  it  can  be  disre- 
garded in  making  up  the  budget  of  annual  expenses.  Rates  range 
from  15c.  to  30c.  per  $100  per  annum  for  first-class  risks  in  the 
larger  cities,  50c.  to  75c.  per  $100  on  first-class  risks  in  the  smaller 
cities,  $1.00  per  $100  on  stores  and  office  buildings  in  the  smaller 
cities,  and  so  on  up. 

Leases  vary  in  their  provisions  as  to  payment  for  repairs  by 
landlord  and  tenant,  but  if  paid  by  the  tenant  the  rent  is  propor- 
tionately reduced.  Average  repairs  vary  from  one-half  of  i  per  cent 
of  the  value  of  the  building  per  annum  in  the  case  of  the  highest 
type  of  fireproof  buildings,  i  per  cent  for  ordinary  mercantile  build- 
ings, 2  per  cent  for  older  property  or  that  of  cheaper  construction, 
3  per  cent  to  4  per  cent  for  old  tenements,  and  so  on  up  in  proportion 
to  the  age,  character  of  construction,  and  lack  of  care  of  the  buildings. 

The  cost  of  rent  collecting  averages  from  2^  per  cent  to  3  per 
cent  of  the  rent  receipts  in  the  larger  cities,  according  to  the  class 
of  property,  and  about  5  per  cent  in  the  smaller  cities,  according  to 
the  class  of  property.  Owners  who  are  competent  to  manage  real 
estate  may  save  agents'  commissions  by  so  doing,  but  instances  are 
not  uncommon,  especially  as  to  large  business  property,  where 
owners  managing  their  own  property  lose  their  time  and  from  20  per 
cent  to  30  per  cent  of  the  income  which  an  expert  rental  agent  could 
have  obtained. 

An  estimated  scale  of  proportion  of  total  operating  expenses 
and  net  rents  would  be  as  follows,  the  cost  of  services  where  rendered, 


RElh" 


631 


as  in  office  buildings,  apartments  and  some  tenements,  being  included 
in  expenses: 


Low  retail  or  wholesale  buildings 

Residences 

Non-elevator  office  buildings 

Tenements,  non-elevator  and  elevator 

Elevator  apartments 

Fireproof  office  buildings 


Expenses 

Net  rents 

10-25% 

90-75% 

20-30 

80-70 

25-35 

75-65 

25-45 

75-55 

40-55 

6o-4S 

40-55 

6o-4S 

It  is  clear  that  the  lower  the  cost  of  the  building  in  proportion 
to  the  value  of  the  land,  the  nearer  the  income  approaches  to  pure 
ground  rent,  against  which  the  sole  charge  is  taxes.  On  the  other 
hand,  the  more  expensive  the  building  the  higher  the  maintenance 
cost,  owing  both  to  the  greater  number  of  services  rendered  and  to 
the  higher  standard  of  accommodation.  Since  the  operating  expenses 
of  a  building,  whether  fully  or  only  partly  occupied,  vary  but  slightly, 
the  larger  the  proportion  of  expenses  to  gross  rentals  the  more  marked 
will  be  the  rise  or  fall  of  net  rentals  as  gross  rentals  fluctuate.  Ordi- 
narily, expensive  office  buildings  are  properly  located,  the  chief  errors 
being  in  the  erection  of  expensive  buildings  in  small  cities,  or  in  poor 
locations  in  larger  cities.  When  hard  times  cause  a  sharp  drop  in 
rents  in  the  smaller  cities,  instances  have  been  known  of  the  upper 
floors  of  such  buildings  not  earning  sufficient  rent  to  pay  for  the  mere 
services  rendered,  so  that  it  would  pay  for  owners  to  close  the  build- 
ings above  the  ground  floor,  even  though  the  ground  floor  stores  are 
in  active  demand.  The  danger  to  owners  of  heavy  fixed  charges 
is  shown  in  the  following  table: 


With  percentage  of 

expenses  to  gross 

income 

io% 

20 

30    

40    

so     

60     


If  gross 

rents  rise 

or  faU 


Then  net 

rents  rise 

or  fall 


If  gross 

rents  rise 

or  fall 


Then  net 

rents  rise 

or  fall 


If  gross 

rents  rise 

or  faU 


Then  net 

rents  rise 

or  faU 


20% 

20 

20 

20 

20 

20 


22% 

25 

29 

33 
40 
50 


40% 

40 

40 

40 

40 

40 


44% 
50 
56 
66 
80 
100 


60% 

60 

60 

60 

60 

60 


66% 

75 

85 
100 
120 
ISO 


The  next  charge  against  gross  rents  is  for  interest  on  capital 
invested  in  the  building,  this  being  figured  at  the  same  rate  as  the 
capitalization  of  the  ground  rent,  after  an  allowance  for  depreciation 
has  been  made. 


632  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  final  residuum  constitutes  the  economic  or  ground  rent, 
which  represents  the  competitive  premium  paid  for  location.  Where 
there  is  no  residuum  of  ground  rent  in  city  land  it  does  not  follow 
that  the  land  has  no  value,  but  usually  that  the  improvements  are 
not  suitable,  so  that  the  value  must  be  estimated  under  a  different 
utilization.  If  the  improvement  is  a  suitable  one,  absence  of  ground 
rent  may  be  due  to  temporary  drop  in  rentals  or  bad  management, 
all  city  land  normally  yielding  some  ground  rent. 

With  an  established  economic  rent,  the  sole  remaining  factor 
to  transform  this  into  intrinsic  value  is  the  rate  of  capitalization. 
As  capitalization  rates  vary  with  securities,  Government  bonds  sell- 
ing below  a  2  per  cent  basis,  railroad  bonds  and  stocks  on  a  3^  per 
cent  to  5  per  cent  basis,  and  industrials  on  a  7  per  cent  to  10  per  cent 
basis,  so  the  rates  of  capitalization  of  urban  rents  vary  from  4  per 
cent  for  the  highest  class  property  in  the  largest  cities,  to  5  per  cent 
and  6  per  cent  for  second-class  property  in  the  same  cities,  or  for 
first-class  property  in  smaller  cities,  7  per  cent,  8  per  cent,  and  10  per 
cent  for  tenements  in  the  largest  cities,  and  12  per  cent  to  15  per  cent 
for  temporary  utilizations  or  disreputable  purposes  in  the  smaller 
cities.    The  great  power  of  capitaHzation  rates  on  values  is  due  to 
the  fact  that  for  every  change  of  i  per  cent  in  the  rate  of  capitaliza- 
tion, values  may  change  from  twelve  to  twenty-five  times  the  dif- 
ference in  interest.     For  example,  a  property  with  a  net  income  of 
$10,000  would  sell  on  an  8  per  cent  basis  at  $125,000,  on  a  6  per  cent 
basis  at  $166,000,  and  on  a  4  per  cent  basis  at  $250,000.    The  lower 
the  capitalization  rate  the  greater  the  effect  of  any  change  of  values: 
For  example,  a  fall  from  8  per  cent  to  7  per  cent  adds  but  14  per  cent 
to  the  value  of  the  property,  while  a  fall  from  5  per  cent  to  4  per  cent 
adds  25  per  cent  to  the  value  of  the  property.     Moreover,  as  large 
interest  rates  apply  to  the  largest  properties  all  further  fractional 
lowering  of  low  interest  rates  results  in  an  enormous  mass  of  values. 
The  marked  difference  between  capitalization  rates  of  high  class 
and  low  class  property  in  the  same  city  indicates  the  large  number 
of  people  who  desire  to  own  high  class  property,  and  the  few  who 
desire  to  own  low  class  property.    The  reason  for  such  preference 
is  that  with  high  class  property,  rents  are  more  stable  and  easily 
collected,  the  property  is  more  quickly  and  certainly  convertible, 
it  can  be  mortgaged  at  a  lower  rate  of  interest  and  for  a  larger  per- 
centage of  value,  the  buildings  depreciate  much  less  rapidly  and  the 
prospects  of  increase  in  value  are  better. 


RENT  633 

That  land,  even  of  the  highest  type  and  in  the  largest  cities,  is 
a  slow  asset,  is  due  to  a  number  of  causes,  among  them  being  the 
fact  that  land  is  not  easily  passed  from  hand  to  hand  as  are  stocks 
and  bonds  land  involves  personal  or  directly  deputed  management, 
where  stocks  and  bonds  do  not,  there  is  no  Exchange  with  daily 
quotations  giving  the  values  of  land,  as  with  stocks  and  bonds;  and 
finally  the  value  of  land  is  influenced  by  many  complex  changing 
factors,  whose  effects  are  differently  estimated  by  different  people. 
Because  land  is  a  slow  asset,  convertibility,  or  certainty  and  speed 
in  selling  it,  produces  a  high  premium  for  the  best  property  by  lower- 
ing its  capitalization  rate. 

To  look  at  the  problem  from  the  individual  standpoint,  in  attempt- 
ing to  state  the  value  of  any  single  property,  the  inquiry  would  seek 
first,  upon  what  forces  does  the  city  itself  depend,  how  permanent 
are  they,  how  diversified,  are  they  strengthening  and  what  is  the 
resulting  index  figure,  to  wit,  the  rate  of  increase  of  the  city's  popula- 
tion; next,  what  are  the  characteristics  of  the  section  of  the  city  in 
which  the  property  is  located,  its  past  history,  its  present  stability, 
its  future  prospects;  what  is  the  central  strength  of  the  property, 
how  near  the  main  center  of  the  city  or  the  various  subcenters  of 
attraction;  what  is  its  axial  strength,  the  quantity,  quality,  and 
regularity  of  the  passing  travel,  what  is  the  character  of  building  on 
the  property  as  to  suitability,  planning,  physical  condition,  prospect 
of  changing  utility,  management,  convertibility,  gross  and  net  income; 
at  what  prices  have  surrounding  property  been  selling,  are  they 
rising  or  falling,  and  do  they  suggest  any  factors  not  yet  taken  into 
accoimt;  is  the  property  liable  to  be  injured  or  benefited  by  changes 
in  the  building  laws;  is  there  any  special  enterprise  or  strength  on 
the  part  of  the  owner  or  of  surrounding  owners  likely  to  affect  the 
property;  what  would  be  the  probable  effect  of  any  inventions  or 
improvements  in  transportation  or  the  construction  of  buildings, 
and,  finally,  what  are  the  general  commercial  conditions  as  affecting 
the  earning  power  of  tenants,  actual  or  prospective,  and  financial 
conditions  as  affecting  the  capitalization  rate. 

The  problem  is  never  a  simple  one,  being  as  complex  as  city  life 
itself,  but  it  is  not  insoluble,  since  the  forces  creating  cities  are  governed 
by  imiform  laws,  like  causes  producing  like  results,  apparent  excep- 
tions being  due  to  the  influences  of  factors  not  reckoned  on.  The 
popular  impression  that  the  ability  to  forecast  future  movements  of 
city  growth  points  a  quick  way  to  fortune  is  an  over  estimate,  since 


634  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

real  estate  movements  are  slow,  large  capital  is  required  to  handle 
it,  carrying  charges  are  heavy,  and  even  though  the  forecast  may  be 
ultimately  correct,  the  rate  of  movement  is  uncertain,  depending  on 
the  operation  of  vast  economic  forces  impossible  of  exact  prediction. 

If  business  expands  and  population  increases  in  a  city,  the  sum 
total  of  land  values  is  certain  to  increase.  All  the  land,  however, 
will  by  no  means  increase  in  value,  the  great  mass  of  medium  busi- 
ness and  residence  property  advancing  but  slowly  since  it  supplies 
the  wants  of  a  large  number  of  people  of  moderate  earning  power 
who  cannot  pay  beyond  a  certain  price.  Coincident  with  the  gradual 
lifting  of  values  as  population  becomes  more  dense,  decaying  sections, 
left  behind  in  the  onward  march,  drop  down  the  scale  of  inferior 
utilities  and  values,  sometimes  to  the  point  of  extinction.  Such 
worn-out  property  exhibits  in  its  dilapidations  both  absence  of  utility 
and  public  confession  of  that  fact.  If  population  and  business 
become  stationary  the  sum  total  of  land  values  will  decrease  in  pro- 
portion to  the  previous  discounting  of  future  growth,  subsequent 
movements  consisting  of  redistribution  of  value,  as  one  part  of  the 
city  or  another,  or  one  individual  or  another,  flourishes  or  declines. 

The  principal  causes  of  the  redistribution  of  value  in  all  cities 
are,  increase  in  population  and  wealth,  especially  in  causing  reloca- 
tion or  extension  of  the  best  residence  district,  changes  in  transporta- 
tion, such  as  new  surface,  elevated,  or  underground  lines,  new  bridges, 
tunnels,  ferries,  and  railroads,  and  the  readjustments  of  new  utilities 
in  new  areas  harmonizing  the  complex  contending  factors. 

183.     CAR-FARES  AND  SUBURBAN  SITE-VALUES' 

If  we  consider  the  normal  working-class  family  as  containing  four 
or  five  persons,  as  I  think  is  reasonable,  and  assume  a  five-cent  fare 
to  carry  them  from  their  suburban  homes  to  their  work,  you  must 
add,  as  I  calculate  it,  $600  to  the  cost  of  their  house  and  lot  to  repre- 
sent the  capitalized  value  of  one  trip  every  working-day  of  the  year, 
say  300  days  for  one  member  of  that  family.  And  if,  as  I  think  is 
also  reasonable,  we  assume  that  on  the  average  two  of  every  family 
are  wage-earners,  and  consequently  must  take  that  daily  trip,  we  have 
at  once  the  sum  of  $1,200  representing  capitalized  transportation 
expenses  to  add  to  the  actual  cost  of  the  house  and  lot  in  which  we 

'Adapted  from  Grosvenor  Atterbury,  "Garden  Cities,"  in  Housing  Problems 
(Proceedings  of  the  National  Housing  Association),  II  (1912),  107-8, 


RENT  63s 

propose  to  put  them  in  the  suburb,  as  against  the  city  tenement  from 
which  we  are  supposed  to  take  them,  where  the  workers  can  walk  to 
and  from  their  place  of  work. 

Now  see  what  this  means.  I  think  it  is  fair  to  assume  that  in  the 
neighborhood  of  a  great  city,  within  the  five-cent  radius,  an  hour's 
ride,  a  lot  such  as  we  consider  a  minimum  garden  city  lot,  say  30  feet 
by  100,  will  cost  between  $750  and  $1,000.  One  may  get  it  for  less 
than  that,  but  if  so,  he  probably  gets  surrounding  conditions  which  are 
inimical  to  the  purposes  we  have  in  mind.  You  put  upon  a  lot,  which 
we  will  assume  as  costing  when  improved  $1,000,  a  house  which  wUl 
cost  from  $3,000  to  $5,000.  I  am  speaking  now  of  eastern  cities  like 
New  York.  But  while  the  figures  vary  in  different  sections  of  the 
country,  this  ratio  remains  pretty  constant,  and  the  point  I  am  trying 
to  demonstrate  I  think  holds. 

In  other  words,  we  have  an  investment  ranging  anywhere  from 
$3,500  to  $6,000,  and,  because  it  is  removed  by  a  five-cent  fare  from 
the  place  where  the  wage-earner  goes  to  his  work,  we  must  add  from 
20  to  35  per  cent  to  obtain  the  real  basis  of  interest  charges  for  that 
property,  since  to  live  in  it  the  family  must  pay  a  sum  equaling  the 
interest  on  the  additional  $1,200.  If  it  becomes  a  ten-cent  fare,  this 
amoimts  to  an  increase  of  40  to  70  per  cent.  If  the  fare  is  as  high 
as  fifteen  or  twenty  cents  to  take  the  worker  to  his  work  and  back  the 
cost  of  the  house  and  lot  in  this  sense  is  practically  doubled. 

184.    THE  VALUE  OF  A  CHICAGO  QUARTER- ACRE,  1830-94^ 

Probably  the  most  striking  illustration  ever  made  of  the  pecuni- 
ary advantages  of  social  growth  which  attach  to  land  well  situated 
to  command  public  benefits  was  presented  at  a  dinner  of  the  Chicago 
Real  Estate  Board,  in  November,  1893,  by  F.  R.  Chandler,  a  real 
estate  expert  of  long  experience,  whose  integrity  and  conservative 
judgment  give  to  his  statements  exceptional  importance.  It  con- 
sisted of  a  table  showing  the  economic  history,  year  by  year  from 
1830  to  1894,  of  the  most  valuable  quarter  acre  of  land  in  the  city 
of  Chicago.    This  table  is  a  genuine  contribution  to  economic  data. 

Mr.  Chandler's  preparatory  labors  were  arduous  and  conscientious. 
He  first  searched  for  the  prices  at  which  numerous  valuable  sites  in 
the  business  center  of  the  city  had  been  sold  since  1830;  and  though 

•  From  Eighth  Biennial  Report  of  the  Bureau  of  Labor  Statistics  of  Illinois 
( 1894),  pp.  276-79. 


636  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

no  single  site  had  been  transferred  often  enough  to  indicate  its  annual 
changes  of  value,  the  great  mass  of  statistics  which  Mr.  Chandler 
collected  as  to  prices  in  the  neighborhood  of  every  lot  that  came  within 
the  range  of  his  examination,  together  with  the  prices  of  each  such  lot 
itself,  enabled  him  to  fairly  estimate  the  land  value  of  that  neigh- 
borhood. By  applying  this  method  to  several  of  the  more  valuable 
neighborhoods  of  the  business  section,  and  confirming  his  estimates 
by  reference  to  public  records,  private  archives,  and  market  reports, 
he  ascertained  the  different  values  at  different  times.  Mr.  Chandler 
then  obtained  the  opinions  of  100  of  the  best  posted  real  estate  men 
in  Chicago  as  to  the  most  valuable  quarter  acre  in  the  city.  Pre- 
ponderance of  opinion  settled  upon  the  southwest  comer  of  State 
and  Madison  streets,  part  of  the  school  fund  property  controlled  by 
the  Board  of  Education.  This  had  never  been  sold,  but  with  the 
information  he  had  already  collected  regarding  the  prices  of  neighbor- 
ing property,  Mr.  Chandler  was  able  to  determine  the  value  of  the 
quarter  acre  in  question  for  each  year  from  1830  to  1894.  This  i;; 
the  property  to  which  the  table  relates. 

But  for  the  figures  showing  the  number  of  improved  average  Illi- 
nois farms,'  and  the  numbers  of  days'  or  years'  work  at  unskilled  labor' 
that  would  have  been  necessary  each  year  to  buy  this  quarter  acre, 
the  following  table  (p.  637)  is  as  Mr.  Chandler  constructed  it,  the 
barometrical  changes  referring  of  course  to  business  conditions. 

Here  we  find  this  quarter  acre  of  raw  prairie  land  near  the  mouth 
of  the  Chicago  river,  worth  in  1830,  when  the  population  of  Chicago 
numbered  fifty  people,  but  $20  in  money,  or  13^  days' unskilled  labor. 
It  would  not  then  have  exchanged  for  one  one-hundredth  part  of  an 
average  Illinois  farm  of  the  present  time.  With  population  increasing 
and  business  promising,  this  quarter  acre  rose  in  value  year  by  year 
until,  in  the  "boom"  of  1836,  it  was  worth  $25,000.  At  that  time  it 
would  have  taken  fifty-five  years'  unskilled  labor  to  buy  it,  and  it 
would  have  exchanged  for  twelve  average  Illinois  farms  of  the  present 
time.  But  the  panic  came  in  1837,  and  this  quarter  acre  fell  to  almost 
one-tenth  of  its  "  boom  "  value.  Throughout  the  succeeding  business 
depression  it  continued  to  fall  until  1842,  when  it  reached  bottom  at 

'The  average  size  of  farms — 62.38  acres,  and  the  average  value — $32.87 
per  acre,  are  taken  from  the  report  of  this  Bureau  for  1890,  p.  257. 

'  Unskilled  labor  is  estimated  at  $1 .  50  a  day  for  each  year  of  the  period.  Part 
of  the  time  it  was  less,  and  part  of  the  time  more;  but  this  sum  will  be  recognized 
as  fair  for  the  purposes  of  the  comparison. 


RENT 


637 


s 


1830 
(831 
[83a 
t833 
1834 
183s 
1836 

1837 
1838 
1839 
1840 
1841 
1842 
1843 
1844 
184s 
1846 
1847 
1848 
1849 
1850 
1851 
i8sa 
i8S3 
1854 
185s 
1856 
I8S7 
1858 
i8S9 
i860 
1861 
1862 
1863 
1864 
i86s 
1866 
1867 
1868 
1869 
1870 
1871 
187a 
1873 
1874 
187s 
X876 

1877 
1878 
1879 
1880 
1881 
i88a 
1883 
1884 
i88s 
1886 
1887 
l888 
1889 
1890 
1891 
189a 

1893 
1894 


Changes  of  Barometer 


Clearing . . . 

Fair 

War  storm . 

>  Rising 

Booming. . . 
Panic. 


Depression.. 


Rising., 


Booming 

Panic 

Showers  of  gold. .  . . 
Mirage  of  wild  cat . 


Rising. 


Drought . 

Buoyant. 

Booming., 

.  Panic. . . . 


■  Depression., 


Calm. 


Rising.. 


Very  hot. 
Booming. 
Panic. . . . 


Depression . 

Gold  rays. . 

■  Rising 

Stormy . . . . 


'  Rising  higher. 


Great  war  clouds  . . . 


Booming 

/  Columbian  sunshine 
I  overcomes  panic .  . . . 


Popula- 
tion of 
Chicago 


SO 
100 

200 

3S0 

2,000 

3.26s 

3,820 

4.179 

4,000 

4,200 

4.470 

5,000 

6,000 

7.589 

8,000 

12,088 

14,169 

16,859 

20,023 

23.047 
28,269 
34,000 

38,754 
60,662 
65.87a 
80,023 

84,113 

93.000! 

91,000 

95,000 

109,000 

120,000 

138,000 

160,000 

169,353 
178,900 
200,418 
220,000 
252.054 
272,043 
298,977 
325,000 
367,396 
380,000 
395,408 
400,000 
407,661 
420,000 
436,731 
465,000 
503.298 
S30,ooo| 
560,693 
590,000! 
629,985! 
700,000 
825.880 
850,000 
875.500 
900,000; 
1,098.570! 
1,200,000 
1 ,300,000 

I^4O0,0OO 

1,500,000 


a  a 


100 

ioo 

75 

467 

60 

17 

10 

-4 

5 

6 

12 

20 

as 
6 
SO 
16 
18 
as 
IS 

22 

22 

14 
60 

9 
23 

5 
II 
—  2 
,  4 
15 
10 
15 
16 

6 

6 
12 
10 

IS 
8 

9 

9 

13 

3 

4 

I 

a 

3 

4 

7 

8 

5 

6 

6 

6 

II 

18 

3 

3 

3 

22 

10 

9 

3 


Value  of 

Quarter 

Acre 


$20 
22 

30 

50 

200 

5,000 

25,000 

3.000 

2,500 

2,000 

i.Soo 

1,250 

1,000 

1,100 

1,200 

5,000 

15,000 

12,000 

13,000 

15,000 

17.500 

20,000 

25,000 

30,000 

35.000 

40,000 

45 ,000 

35 ,000 

30,000 

29,000 

28,000 

28,000 

32,000 

33,000 

36,000 

45.000 

57,600 

65,000 

80,000 

90,000 

120,000 

100,000 

125,000 

100,000 

95,000 

92,500 

90,000 

90,000 

95 ,000 

119,000 

130,000 

145,000 

175,000 

238,000 

250,000 

275,000 

325,000 

•435,000 

600,000 

750,000 

900,000 

1,000,000 

1,000,000 

1,000,000 

1,250,000 


S  o 

3   4) 


10 

40 
67 

300 
2400 

400 


10 
10 
20 

200 

9 
IS 
17 
14 

2S 

20 
17 
14 
12 


IS 

3 

13 

25 
28 
12 

23 
12 

33 
25 


S 
25 
10 
la 
ai 
36 

S 

10 
i3 
34 
38 
^5 

20^ 
IX 


Pg 

< 


Number 

of  Average 

Illinois 

Farms  at 

$2,050,    Ne 

cessary  to 

Buy  the 

Quarter 

Acre 


17 

20 
5 
3 
3 


0.009 

O.OII 

o.ois 

0.024 
0.098 

a. 44 
12.2 

1.47 
1.22 

0.97 

0.73 

0.61 

0.49 

O.S4 

O.S9 

a. 44 

7-32 

S.8S 

6.34 

7-32 

8.54 

9.76 

12.2 

14.63 

17.07 

19-51 

21-95 

17.07 

14-63 

14  IS 

13-66 

13-66 

i5-6i 

16. 1 

17.56 

21.95 

28.1 

31-71 

39  02 

43-9 

58-54 

48.78 

60-73 

48-78 

46.39 

4S-I2 

43-9 

43.9 

46.39 

58 -OS 

63-41 

70.73 

85.37 

116. 1 

121.95 
I3415 
158.54 

212.2 
392.2 
365-85 

439  02 

487.8 

487.8 

487.8 

609.76 


Number  of 
Days'  Work 

at  $1.50  a 
Day,  Neces- 
sary to  Buy 

the  Quar- 
ter Acre 


13-33 

14.67 
20 

33-33 
133-33 


Number  of 
Years'  Work 
at  $1  -  so  a 
Day  and  300 
Days  to  the 
Year,  Neces- 
sary to 
Buy  the 
Quarter 
Acre 


II. II 
55.56 
6.67 
S.S6 
4-44 
3.33 
2.78 
a.aa 
a. 44 
a.  67 
II. II 

33-33 
26.67 
28.89 
33.33 
38.89 
44.44 
55.56 
66.67 
77.78 
88.89 
100 
77-78 
66.67 
64-44 
62.2a 
63.  aa 
71-I1 

73-33 

80 
100 
128 

144-44 
177.78 
200 
266.67 
222.22 
277.78 
222.22 
211. II 
205.56 
200 
200 

211. 14 
264.49 
288.81 

322.22 
388.89 
528.89 
556.56 
611. II 

7aa.2a 

744.44 

1 ,333-33 

1,666.67 

a, 000 

2,222.23 
2,232.23 
2,222.22 

a.777-78 


'  Authority  of  Real  Estate  Board  Valuation  Committee- 


63?  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

a  value  of  $i,ooo,  which  was  five  times  as  much,  however,  as  its  value 
just  before  the  "boom"  began. 

With  the  return  of  better  times  in  1843,  and  an  increase  of  popu- 
lation, the  quarter  acre  began  again,  though  timidly,  to  rise  in  value; 
but  in  1845,  with  a  largely  increased  population,  it  had  risen  to  $5,000 
and  in  1846,  in  the  second  "boom,"  to  $15,000.  The  "boom"  was 
followed  as  usual  by  a  panic,  and  notwithstanding  an  increase  in 
population  of  18  per  cent,  the  value  of  the  quarter  acre  dropped  to 
$12,000.  The  collapse  of  this  "boom,"  it  will  be  observed,  left  the 
property  at  a  value  twelve  times  higher  than  the  point  to  which  it 
had  dropped  upon  the  collapse  of  the  previous  "boom." 

The  gold  discoveries  and  a  continual  growth  in  population  revived 
the  value  slightly  in  1848.  From  that  time  on  it  rose  rapidly  to  a 
culmination  of  $45,000 — equal  to  twenty-one  average  Illinois  farms 
of  the  present  time,  and  100  years  of  one  man's  labor — in  the  "  boom  " 
year  of  1856.  The  panic  of  1857  at  once  brought  it  down  to  $35,000 
and  the  succeeding  period  of  hard  times  continued  to  reduce  it  until 
in  1861  it  was  as  low  as  $28,000.  But  from  this  point  it  steadily 
rose  through  the  war  and  the  brisk  times  that  followed,  and  even 
through  the  period  of  the  great  fire,  until  1872,  when  it  was  worth 
$  1 2  5 ,000.  Once  more  there  came  a  panic  and  a  depression,  out  of  which 
this  quarter  acre  emerged  in  1878  with  a  value  of  $95,000 — nearly 
four  times  its  value  on  the  crest  of  the  first  "boom,"  six  times  its 
value  on  the  crest  of  the  second,  and  twice  its  value  on  the  crest  of 
the  third. 

With  the  return  of  better  times  in  1879  the  value  of  the  quarter 
acre  sprang  forward  once  more,  and  since  that,  through  good  times 
and  bad,  it  has  gone  steadily  on.  In  the  "boom"  year  of  1890  it 
was  worth  $900,000.  The  next  year  it  went  up  to  $1,000,000,  where 
it  remained  until  1894,  when  its  value  was  estimated  at  $1,250,000. 

Six  hundred  average  Illinois  farms  would  not  now  exchange  for 
that  quarter  acre  of  raw  prairie  land,  and  nearly  3,000  years  of  the 
labor  of  one  man  would  be  required  to  buy  it.  If  500  years  before 
the  Christian  era,  some  man  had  obtained  employment  at  the  equiva- 
lent of  $1 .50  a  day,  had,  like  some  Wandering  Jew,  been  preserved 
through  all  the  vicissitudes  of  the  centuries,  had  been  miraculously 
sustained  without  expense  for  any  of  the  necessaries  or  luxuries  of 
life,  had  done  his  work  regularly  from  that  day  to  this,  300  days  in  the 
year  without  losing  a  day,  and  had  hoarded  all  his  wages,  his  savings 
would  not  yet  be  enough  to  buy  this  quarter  acre  of  prairie  land  at  the 
mouth  of  the  Chicago  river. 


RENT  639 

The  conservative  character  of  Mr.  Chandler's  estimate  is  demon- 
strated by  examination  of  the  ground  leases  of  land  lying  in  the 
neighborhood  of  the  quarter  acre  to  which  his  table  relates. 

185.    EXAMPLES  OF  REAL  ESTATE  TRANSACTIONS' 

a)  Max  Goldstine,  who  has  acquired  much  property  by  purchase 
and  long  term  lease  in  the  past  year,  has  added  to  his  holdings  in  the 
block  in  Clark  street,  between  Washington  and  Madison  streets,  by 
leasing  from  Mary  J.  Hoxie  and  David  G.  Hamilton  the  premises  on 
the  west  side  of  the  street  for  99  years  from  May  i,  191 1,  at  a  net 
annual  rent  of  $6,000  for  the  first  five  years  and  $6,500  for  the 
remainder  of  the  term. 

The  lot  is  i9fX8o  feet.  Capitalizing  the  rent  on  a  4  per  cent 
basis  it  gives  $162,500,  which  is  at  the  rate  of  $102  a  square  foot,  or 
$8,200  a  front  foot.  The  board  of  review  valued  the  property  at 
$89,650,  of  which  $5,050  was  in  the  old  four  story  building  on  the 
premises.     Mark  Levy  &  Bro.  were  the  brokers. 

Several  months  ago  Mr.  Goldstine,  through  the  same  brokers, 
leased  from  John  T.  Boddie  the  property  adjoining  on  the  south, 
40.5X80,  for  99  years  at  an  annual  rent  of  $13,000  so  that  he  now 
has  a  holding  60.25X80  feet.  Mr.  Goldstine  is  to  erect  a  new  fire- 
proof building  prior  to  May  i,  1922,  to  cost  not  less  than  $150,000. 

It  is  interesting  to  note  that  in  1844  Joel  Manning  purchased  the 
whole  lot  8,  fronting  80  feet  on  Madison  street  and  196  feet  on  Clark 
street,  for  $1,500. 

b)  The  property  at  the  southwest  corner  of  South  Water  and 
Dearborn  streets  was  first  sold  by  the  estate  of  Simon  Reid  to  Henry 
Botsford  and  then  leased  for  a  term  of  99  years  to  Frank  and  Lawrence 
Cuneo,  who  occupy  it  with  their  business.  It  fronts  43  feet  on  South 
Water  Street  with  a  depth  of  50  feet  on  Dearborn,  and  is  improved 
with  a  four  story  and  basement  building. 

Mr.  Botsford  paid  $127,000  for  the  property  and  then  leased  to  the 
Cuneos  at  an  annual  rent  of  $6,435,  they  paying  $10,000  for  the  build- 
ing. J.  A.  Briggs  &  Co.  represented  the  purchaser  and  the  lessees 
in  the  transaction,  while  Howard  Grey  represented  the  Reid  estate. 

Capitalizing  the  ground  rent  on  a  4  per  cent  basis  gives  $160,875, 
or  over  $74  a  square  foot.  The  board  of  review  valued  the  property 
at  $117,130. 

'  From  the  Chicago  Daily  Tribune,  February  28,  191 1. 


XV.    WAGES 

1 86.    LABOR  AS  A  SOURCE  OF  INCOME' 

For  the  purposes  of  this  essay,  the  income  of  an  individual  is  the 
aggregate  of  economic  goods  which  in  the  course  of  a  unit  of  time 
become  available  to  him  for  final  consumption  without  entailing 
impairment  of  his  capital.  Unless  otherwise  stated,  the  time  unit 
is  the  year,  and  the  income  is  expressed  in  terms  of  money.  So 
defined,  personal  incomes  are  derived  from  three  sources:  from 
labor,  from  the  ownership  of  property,  and  from  the  rights  of  private 
property. 

"Labor  is  a  wealth-creating  effort. '"  Any  human  exertion 
directed  primarily  toward  the  creation  of  utility,  is  labor.  Although 
the  work  of  a  child  at  school  may  create  "productive  power,"  the 
immediate  end  not  being  production,  it  is  not  economic  labor.  "The 
remuneration  of  labor,"*  "the  earnings  assigned  to  men  for  their 
work,"<  in  other  words,  the  recompense  of  human  exertion  in  the 
production  of  utility  is  wages.  Thus  in  the  economic  sense  wages 
includes  more  than  is  popularly  understood  by  the  term,  includes 
all  material  incomes  which  reward  labor.  Theoretically  every  one 
of  the  thirty  million  Americans  engaged  in  gainful  occupations 
either  actually  receives  or  should  impute  to  himself  w^ages.  The 
salary  of  the  president  of  the  United  States  Steel  Corporation,  the 
profit  of  the  underwriter,  and  the  pay  of  the  laborer  fall  in  the  same 
category.  These  examples,  however,  illustrate  the  three  varieties 
of  wages. 

Perhaps  it  would  be  better  to  say  that  there  are  two  classes  of 
wages,  one  of  which  may  be  subdivided.  In  the  first  place,  the 
amount  of  remuneration  may  be  determined  in  advance  by  definite 
agreement.  Such  a  stipend  is  a  salary  if  the  contract  is  for  a  year 
or  more,  wages  (in  the  popular  sense)  if  the  time  unit  is  less  than 

'  Adapted  from  F.  H.  Streightoff,  The  Distribution  of  Incomes  in  the  United 
States,  pp.  27-33.  Columbia  University  Studies  in  History,  Economics,  and  Public 
Law,  Vol.  LII,  191 2. 

'  J.  B.  Clark,  Essentials  of  Economic  Theory,  p.  9. 
3  Seligman,  Principles  of  Economics,  p.  411. 
*  Seager,  Introduction  to  Economics,  p.  222. 

640 


WAGES  641 

twelve  months.'  Although,  perhaps,  not  strictly  included  by  the 
definition,  what  are  generally  known  as  piece  payments  are  rightly 
classed  with  wages  proper  for  two  reasons:  First,  the  piece  rate  is 
usually  determined  in  the  beginning  by  what  a  normal  operative 
produces  in  a  given  period,  and  is  frequently  reduced  if  this  standard 
is  much  exceeded;'  second,  the  tasks  of  the  piece  worker,  and  his 
social  position,  correspond  very  closely  to  those  of  the  time  worker. 
The  other  class  of  rewards  of  labor  includes  those  forms  of  compensa- 
tion which  depend  in  a  peculiar  degree  upon  the  skill,  energy,  and  good 
fortune  of  the  recipient.  Under  this  head  would  fall,  for  example, 
the  commissions  of  salesmen  and  of  brokers,  the  "profits"  of  the 
farmer  and  shop-keeper  (except  interest  on  capital),  the  incomes  of 
physicians  and  lawyers,  and  a  large  part  of  the  speculator's  gain. 
Although  there  seems  to  be  no  recognized  name  for  this  group  of 
indeterminate  remunerations,  for  convenience,  and  without  essential 
inaccuracy,  it  may  be  styled  "contingent  earnings."  The  income  of 
a  particular  individual  may  vary  but  little  from  year  to  year  and  still 
be  in  a  proper  sense  "contingent."  This  distinction  is  by  no  means 
fanciful,  for,  in  addition  to  the  economic  significance,  there  are  corre- 
sponding lines  of  social  cleavage.  In  society  the  salaried  man  seems 
to  occupy  a  higher  position  than  the  wage  earner,  regardless  of  the 
comparative  size  of  their  incomes;  in  the  four  hundreds,  are  the 
families  enjoying  contingent  earnings.  Doubtless  this  social  grada- 
tion is  partly  due  to  the  distribution  of  property:  the  wage- worker 
is  seldom  a  large  owner,  the  salaried  person  may  not  possess  property 
but  often  does,  and  a  prime  requisite  for  the  enjoyment  of  a  con- 
tingent income  is  frequently  the  control  of  some  capital. 

That  one  man  may  procure  labor  incomes  of  all  three  classes 
should  require  no  explanation.  A  professor,  for  instance,  may  be 
paid  a  salary  for  teaching,  he  may  be  given  a  weekly  wage  for  siunmer 
work  in  a  governm-ent  bureau,  and  may  in  addition  be  blessed  with 
large  checks  for  scientific  articles,  or  fees  as  a  consulting  expert. 
Thus  one  person  may  receive  a  salary,  wages,  and  a  contingent 
income. 

Recognizing,  then,  this  demarkation  of  the  rewards  of  labor 
into  wages,  salaries,  and  contingent  earnings,  the  question  of  the 
relative  importance  of  these  groups  arises.    Although  no  attempt 

'  Abstract  of  the  Twelfth  Census,  p.  3CX),  note  2. 

'  Adams  and  Sumner,  Labor  Problems,  p.  264;  Twelfth  Censiis,  Employees 
and  Wages,  p.  xix. 


642 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


has  ever  been  made  in  the  United  States  to  gather  statistics  upon 
the  basis  of  such  a  classification,  an  approximation  may  be  obtained 
from  the  data  in  the  Census  of  Occupations  and  in  the  Census  of 
Manufactures.  The  latter  distinguishes  between  "firm  members," 
"salaried  employees,"  and  "wage-earners."  In  the  light  of  this 
information,  and  of  a  general  knowledge  of  the  modes  of  remunera- 
tion in  the  various  branches  of  industry,  it  is  possible  to  form  a 
rough  table. 

Classification  of  Recipients  of  Incomes  from  Labor  in  thb 
United  States,  1900 


I 

II 

m 

IV 

Division  of  Industry 

Wages 

Salaries 

Contingent 
Earnings 

Agricultural  pursuits 

4,863,000 
6,000 
5,154,000 
2,317,000 
6,001,000 

18,000 

819,000 

131,000 

1,079,000 

403,000 

5,557,000 
440,000 
409,000 

1,382,000 
709,000 

Professional  service 

Domestic  and  personal  service  .... 
Trade  and  transportation 

Manufacturing*  and  mechanical .  . . 

Totals 

18,341,000 

2,450,000 

8,497,000 

•Proprietors  and  firm  members,  708,633;  salaried  officials,  clerks,  etc.,  307,092;  wage-earners 
(average  number),  5,314,339.     Abstract  of  the  Twelfth  Census,   p.  300. 

From  this  it  would  appear  that,  of  the  twenty-nine  million  persons 
gainfully  employed  in  1900,  about  six-tenths  were  wage-earners, 
nearly  one-tenth  were  on  salaries,  and  approximately  three-tenths 
enjoyed  contingent  incomes.'  In  this  connection  it  is  interesting 
to  note  that  the  salary  seems  to  be  gaining  in  favor  over  the  wage 
as  a  form  of  remuneration. 

The  second  source  of  income  is  the  ownership  of  property.  The 
yield  of  lands  and  houses,  the  return  from  capital — whether  invested 
in  mortgages,  bonds,  stocks,  partnerships,  or  individual  businesses — 
royalties,  and  other  less  important  forms  of  revenue,  in  fact  all  that 
the  economist  calls  rent,  interest,  and  profits,  are  included  in  this 
class.  Profits  belong  to  the  owner  of  a  business,  whether  or  not  he 
owns  the  capital  or  manages  the  concern.  In  its  pure  form,  income 
from  property  ownership  accrues,  for  example,  to  one  whose  fortune 
consists  of  stocks  and  long-term  bonds,  one  who  receives  dividends 

'  It  is  interesting  to  note  the  rough  agreement  between  these  results  and  the 
estimate  of  Professor  Seager — employing  class,  9,830,000;  employed  class,  19,- 
100,000. 


WAGES  643 

and  interest  without  the  necessity  of  reinvesting;  or  to  a  person  who 
leaves  the  administration  of  his  wealth  entirely  in  the  hands  of  an 
agent,  trustee,  or  attorney.  If,  however,  the  individual  speculates 
on  the  exchange,  rents  his  own  houses,  purchases  short-time  mortgages, 
tills  his  farm,  or  conducts  his  store,  then  his  income  is  derived  from 
two  sources,  labor  and  the  ownership  of  property.  However  clever 
he  may  be,  without  the  control  of  property,  the  speculator  can  not 
carry  on  his  business,  and  so,  although  his  skill  enormously  increases 
his  earnings,  they  are  due  in  part  to  capital,  are  not  pure  economic 
wages.  There  seems  to  be  a  considerable  number  of  men,  who, 
with  a  small  sum  of,  say,  ten  thousand  dollars,  by  devoting  their 
entire  time  to  the  stock  market,  extract  annual  incomes  of  an  approxi- 
mately equal  amount.  By  way  of  contrast,  it  is  not  an  extremely 
infrequent  phenomenon  for  the  proprietor  of  a  business  to  continue 
year  after  year  with  a  net  income  less  than  his  capital  would  earn 
if  otherwise  safely  invested.  His  wages  are  either  negative,  or  else 
they  are  entirely  psychological  and  consist  of  the  pleasure  of  being 
an  entrepreneur;  considering  the  situation  from  another  viewpoint, 
his  wages  are  ample,  but  his  investment  bears  scant  interest.  Thus 
it  is  apparent  how  diflficult  may  be  the  attempt  to  distinguish  between 
income  from  the  ownership  of  property  and  income  from  labor — in 
practice  they  are  frequently  inseparable. 

Incomes  of  the  third  class  are  neither  the  rewards  of  labor,  nor 
the  returns  to  the  owner  of  productive  property.  For  want  of  a 
better  term,  they  may  be  said  to  arise  from  the  right  of  private  property; 
they  include,  mainly,  gifts,  bequests,  and  inheritances. 

187.    TWO  EARLY  THEORIES  OF  WAGES 

(a)      A   COST   OF   SUBSISTENCE   THEORY   OF   WAGES' 

Labor,  like  all  other  things  which  are  purchased  and  sold,  and 
which  may  be  increased  or  diminished  in  quantity,  has  its  natural 
and  its  market  price.  The  natural  price  of  labor  is  that  price  which 
is  necessary  to  enable  the  laborers,  one  with  another,  to  subsist  and 
to  perpetuate  their  race,  without  either  increase  or  diminution. 

The  power  of  the  laborer  to  support  himself,  and  the  family 
which  may  be  necessary  to  keep  up  the  number  of  laborers,  does  not 
depend  on  the  quantity  of  money  which  he  may  receive  for  wages, 

» Adapted  from  David  Ricardo,  Principles  of  Political  Economy  and  Taxation 
(1817),  chap.  V. 


644  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

but  on  the  quantity  of  food,  necessaries,  and  conveniences  become 
essential  to  him  from  habit,  which  that  money  will  purchase.  The 
natural  price  of  labor,  therefore,  depends  on  the  price  of  the  food, 
necessaries,  and  conveniences  required  for  the  support  of  the  laborer 
and  his  family.  With  a  rise  in  the  price  of  food  and  necessaries,  the 
natural  price  of  labor  will  rise;  with  the  fall  in  their  price,  the  natural 
price  of  labor  will  fall. 

The  market  price  of  labor  is  the  price  which  is  really  paid  for  it, 
from  the  natural  operation  of  the  proportion  of  the  supply  to  the 
demand;  labor  is  dear  when  it  is  scarce,  and  cheap  when  it  is  plenti- 
ful. However  much  the  market  price  of  labor  may  deviate  from 
its  natural  price,  it  has,  like  commodities,  a  tendency  to  conform  to  it. 

It  is  when  the  market  price  of  labor  exceeds  its  natural  price, 
that  the  condition  of  the  laborer  is  flourishing  and  happy,  that  he 
has  it  in  his  power  to  command  a  greater  proportion  of  the  necessaries 
and  enjoyments  of  life,  and  therefore  to  rear  a  healthy  and  numerous 
family.  When,  however,  by  the  encouragement  which  high  wages 
give  to  the  increase  of  population,  the  number  of  laborers  is  increased, 
wages  again  fall  to  their  natural  price,  and  indeed  from  a  reaction 
sometimes  fall  below  it. 

When  the  market  price  of  labor  is  below  its  natural  price,  the 
condition  of  the  laborers  is  most  wretched:  then  poverty  deprives 
them  of  those  comforts  which  custom  renders  absolute  necessaries. 
It  is  only  after  their  privations  have  reduced  their  number,  or  the 
demand  for  labor  has  increased,  that  the  market  price  of  labor  will 
rise  to  its  natural  price,  and  that  the  laborer  will  have  the  moderate 
comforts  which  the  natural  rate  of  wages  will  afford. 

Notwithstanding  the  tendency  of  wages  to  conform  to  their 
natural  rate,  their  market  rate  may,  in  an  improving  society,  for  an 
indefinite  period,  be  constantly  above  it;  for  no  sooner  may  the 
impulse,  which  an  increased  capital  gives  to  a  new  demand  for  labor, 
be  obeyed,  than  another  increase  of  capital  may  produce  the  same 
effect;  and  thus,  if  the  increase  of  capital  be  gradual  and  constant, 
the  demand  for  labor  may  give  a  continued  stimulus  to  an  increase 
of  people. 


WAGES  645 

(b)      THE   WAGES   FtTND 

The  rate  of  wages  depends  on  the  proportion  between  population 
and  employment,  in  other  words,  capital. 

We  come  now  to  the  question  as  to  what  determines  the  share  of 
the  laborer,  or  the  proportion  in  which  the  commodity,  or  commodity's 
worth,  is  divided  between  him  and  the  capitaHst 

It  is  very  evident,  that  the  share  of  the  two  parties  is  the  subject 
of  a  bargain  between  them;  and  if  there  is  a  bargain,  it  is  not  difficult 
to  see  on  what  the  terms  of  the  bargain  must  depend.  All  bargains, 
when  left  in  freedom,  are  determined  by  competition,  and  the  terms 
alter  according  to  the  state  of  supply  and  demand. 

Let  us  begin  by  supposing  that  there  is  any  number  of  capitalists 
with  a  certain  quantity  of  food,  raw  material,  and  instruments,  or 
machinery;  that  there  is  also  a  certain  number  of  laborers;  and  that 
the  proportion,  in  which  the  commodities  produced  is  divided  between 
them,  has  fixed  itself  at  some  particular  point. 

Let  us  next  suppose  that  the  laborers  have  increased  in  number 
one  half,  without  any  increase  in  the  quantity  of  capital.  There  is 
the  same  quantity  of  the  requisites  for  the  employment  of  labor; 
that  is,  of  food,  tools,  and  material,  as  there  was  before;  but  for  every 
100  laborers  there  are  now  150.  There  will  be  50  men,  therefore,  in 
danger  of  being  left  out  of  employment.  To  prevent  their  being  left 
out  of  employment  they  have  but  one  resource;  they  must  endeavor 
to  supplant  those  who  have  forestalled  the  employment;  that  is,  they 
must  offer  to  work  for  a  smaller  reward.     Wages,  therefore,  decline. 

If  we  suppose,  on  the  other  hand,  that  the  quantity  of  capital  has 
increased,  while  the  number  of  laborers  remains  the  same,  the  effect 
will  be  reversed.  The  capitalists  have  a  greater  quantity  than  before 
of  the  means  of  employment;  of  capital,  in  short,  from  which  they 
wish  to  derive  advantage.  To  derive  this  advantage  they  must 
have  more  laborers  than  before.  These  laborers  are  all  employed 
with  other  masters:  to  obtain  them  they  also  have  but  one  resource — 
to  offer  higher  wages.  But  the  masters  by  whom  the  laborers  are 
now  employed  are  in  the  same  predicament,  and  will  of  course  offer 
higher  to  induce  them  to  remain.  This  competition  is  unavoidable, 
and  the  necessary  effect  of  it  is  a  rise  of  wages. 

It  thus  appears,  that  if  population  increases,  without  an  increase 

'  From  James  Mill,  Elements  of  Political  Economy  (1821),  pp.  25-28. 


646  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  capital,  wages  fall;  and  that  if  capital  increases,  without  an  in- 
crease of  population,  wages  rise.  It  is  evident,  also,  that  if  both 
increase,  but  one  faster  than  the  other,  the  effect  will  be  the  same  as 
if  the  one  had  not  increased  at  all,  and  the  other  had  made  an  increase 
equal  to  the  difference.  Suppose,  for  example,  that  population  has 
increased  one-eighth,  and  capital  one-eighth;  this  is  the  same  thing 
as  if  they  had  stood  still,  with  regard  to  the  effect  upon  labor.  But 
suppose  that,  in  addition  to  the  above-mentioned  one-eighth,  popula- 
tion has  increased  another  eighth,  the  effect,  in  that  case,  upon  wages 
would  be  the  same  as  if  capital  had  not  increased  at  all,  and  population 
had  increased  one-eighth. 

Universally,  then,  we  may  afl5rm,  other  things  remaining  the 
same,  that  if  the  ratio  which  capital  and  population  bear  to  one  another 
remains  the  same,  wages  will  remain  the  same;  if  the  ratio  which 
capital  bears  to  population  increases,  wages  will  rise;  if  the  ratio 
which  population  bears  to  capital  increases,  wages  will  fall. 

Wages,  then,  depend  mainly  upon  the  demand  and  supDly  of 
labor;  or,  as  it  is  often  expressed,  on  the  proportion  between  popula- 
tion and  capital.  By  population  is  here  meant  the  number  only  of 
the  laboring  class,  or  rather  of  those  who  work  for  hire;  and  by 
capital,  only  circulating  capital,  and  not  even  the  whole  of  that,  but 
the  part  which  is  expended  in  the  direct  purchase  of  labor.  To  this, 
however,  must  be  added  all  funds  which,  without  forming  a  part  of 
capital,  are  paid  in  exchange  for  labor,  such  as  the  wages  of  soldiers, 
domestic  servants,  and  all  other  unproductive  laborers.  There  is 
unfortunately  no  mode  of  expressing  by  one  familiar  term  the  aggre- 
gate of  what  may  be  called  the  wages-fund  of  a  country:  and  as  the 
wages  of  productive  labor  form  nearly  the  whole  of  that  fund,  it  is 
usual  to  overlook  the  smaller  and  less  important  part,  and  to  say  that 
wages  depend  on  population  and  capital.  It  will  be  convenient  to 
employ  this  expression,  remembering,  however,  to  consider  it  as 
elliptical,  and  not  as  a  literal  statement  of  the  entire  truth. 

With  these  limitations  of  the  terms,  wages  not  only  depend  upon 
the  relative  amount  of  capital  and  population,  but  cannot,  under  the 
rule  of  competition,  be  affected  by  anything  else.  Wages  (meaning, 
of  course,  the  general  rate)  cannot  rise,  but  by  an  increase  of  the 

'  Adapted  from  John  Stuart  Mill,  Principles  of  Political  Economy  (1848), 
Book  I,  chap.  xi.  * 


WAGES 


647 


aggregate  funds  employed  in  hiring  laborers,  or  a  diminution  in  the 
number  of  the  competitors  for  hire;  nor  fall,  except  either  by  a 
diminution  of  the  funds  devoted  to  paying  labor,  or  by  an  increase  in 
the  number  of  laborers  to  be  paid. 


188.   WAGES  AND  HOURS  OF  LABOR,  1890-1907- 


Calendar 
Year 


1890 
Z891 
1893 

1893 
1894 

189s 
1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
190S 
1906 
1907 


EUPLOYEES 


Per  Cent 
94.8 
97.3 
99.2 
99.4 
94.1 
96.4 
98.6 
100.9 
106.4 

IZ3.I 

iiS-6 
119. 1 
123.6 
126. s 

125-7 
133-6 
142.9 
144.4 


Hours 

Per 
Week 


Per  Cent 


100 
100 
100 
100 

9Q 
100 

99 
99 
99 
99 
98 
98 
97 
96 

95 
95 
95 
95 


Wages 

Per 

Hour 


Per  Cent 

100.3 

100.3 

100.8 

100.9 

97-9 

98.3 

99-7 

99.6 

100.2 

102.0 

105.5 
108.0 
112.3 
116.3 
117. o 
118.9 
124.2 
128.8 


FULL-TlME 

Weekly 
Earnings 
Per  Em- 
ployee 


Per  Cent 

101 .0 
100.8 
101.3 
101 .2 

97- 
98. 

99- 

99- 

99. 

101. 

104. 1 
105 -9 
109.2 
112.3 
112.2 
114.0 
118. s 
132.4 


Retail 
Prices  of 

Food, 
Weighted 
According 
TO  Family 
Consump- 
tion 


Per  Cent 

102.4 

103.8 

101.9 

104.4 

99-7 

97.8 

95-5 

96.3, 

98.7 

99-5 

lOI.I 

105.3 
no. 9 
110.3 
III. 7 
112. 4 
iiS-7 
120. b 


Purchasing  Power 
Measured  by  Re- 
tail Prices  op 
Food,  of — 


Hourly 
Wages 


Per  Cent 

97-9 
96.6 
98.9 
96.6 
98.3 
100. 5 
104.4 

103-4 
loi.s 

102.S 

104.4 
102.7 
101.2 
105-4 
104.7 
10S.8 
■  107-3 
106.8 


FuU-Time 
Weekly 
Earnings 
per  Em- 
ployee 


Per  Cent 
98.6 


97 

99 

96 

98 
100 
104 
103 
101 
101 
103.0 
100.7 

98. 5 
101.8 
100.4 
loi  .4 
102.4 
101.5 


189.  WOMEN'S  WORK  AND  WAGES' 

It  seems  evident  that  modem  improvements  in  machinery  imder 
normal  circumstances  favor  the  employment  of  women  rather  than  of 
men.  There  is  some  reason  to  suppose  that  machinery  also  favors 
the  employment  of  children  as  compared  with  adults,  where  the 
economic  forces  are  allowed  free  play. 

So  far  as  children  are  concerned,  the  economic  tendency  to  adjust 
machine-tending  to  their  limited  strength  is  in  some  measure  defeated 

'  From  Statistical  Abstract  of  the  United  States,  191 2,  p.  296.  Relative  numbers 
are  computed  on  the  basis  of  the  average  for  1890-1899,  taken  as  loo. 

[For  a  suggestion  of  the  significance  of  the  decrease  in  hours  per  week  shown 
by  this  table  see  Selection  209,  "Long  Hours  versus  Efficiency." — Editors.] 

» Adapted  from  J.  A.  Hobson,  The  Evolution  of  Modern  Capitalism,  chap,  xii 
(original  edition).    Walter  Scott  Publishing  Co. 

[This  passage,  written  nearly  twenty  years  ago,  is  in  some  respects  out-of-date. 
— Editors.] 


648  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

by  the  growth  of  strong  public  feeling  and  legislative  protection  of 
younger  children.  Had  full  and  continued  license  been  allowed  to 
the  purely  "economic"  tendencies  of  the  factory  system  in  England 
and  in  America,  there  can  be  little  doubt  but  that  almost  the  whole 
of  the  textile  industry  and  many  other  large  departments  of  manu- 
facture would  be  administered  by  the  cheap  labor  of  women  and  young 
children.  The  profits  attending  this  free  exploitation  of  cheap  labor 
would  have  been  so  great  that  invention  would  have  been  con- 
centrated, even  more  than  has  been  the  case,  upon  spreading  out  the 
muscular  exertion  and  narrowing  the  technical  skill  so  as  to  suit  the 
character  of  the  cheaper  labor.  The  increasing  employment  of  women 
in  machine-industry  is  in  nearly  all  cases  directly  traceable  to  the 
"cheapness"  of  woman's  labor  as  compared  with  man's.  Thus  we 
are  brought  to  the  discussion  of  the  important  question  which  underlies 
all  understanding  of  the  position  of  woman  in  modem  industry — 
"Why  are  women  paid  less  wages  than  men  ?" 

In  almost  all  kinds  of  work  in  which  both  men  and  women  are 
engaged,  the  women  earn  less  than  the  men.  Where  men  and 
women  are  engaged  in  the  same  industries  but  in  different  branches, 
the  wage  level  of  the  woman's  work  is  nearly  always  lower  than  that 
of  the  men.  A  general  survey  of  industry  shows  that  the  highly  paid 
industries  are  almost  invariably  monopolized  by  men,  the  lowly  paid 
industries  by  women.  This  applies  not  only  to  unskilled  and  skilled 
manual  work,  but  to  routine-mental,  intellectual,  and  artistic  work,* 
wherever  custom  or  competition  are  the  chief  direct  determinants  of 
wages.  Certain  exceptions  to  this  rule,  which  readily  suggest  them- 
selves, are  explained  by  the  fact  that  the  wages  of  the  labor  in  question 
are  determined  not  by  custom  or  competition,  but  by  some  other  law. 
Where  the  product  is  of  the  highest  intellectual  or  artistic  quality,  sex 
makes  no  difference  in  the  price;  "the  rent  of  ability"  of  George 
Eliot  or  Madame  Patti  is  determined  by  the  law  of  monopoly  values. 
In  certain  employments,  as,  for  instance,  the  stage,  sexual  attractions 
give  women  a  positive  advantage,  which  in  certain  grades  of  the 
profession  assist  them  to  secure  a  high  level  of  remuneration.  So  also 
in  a  few  cases  governments  or  private  employers  pay  women  as  highly 
as  men  for  the  same  work,  though  women  could  be  got  to  work  for 
less.     But  even  in  those  occupations  where  women  would  seem  to  be 

'This  fourfold  classification — (i)  manual,  (2)  routine-mental,  (3)  artistic,  (4) 
intellectual — is  a  serviceable  suggestion  of  Mr.  Sidney  Webb  in  his  paper  upon 
woman's  wages  {Economic  Journal,  I,  1881). 


WAGES  649 

most  nearly  upon  an  economic  equality  with  men,  in  literature,  art, 
or  the  stage,  the  scale  of  pay  for  all  work,  save  that  where  special  skill, 
personal  attraction,  or  reputation  secures  a  "fancy"  price,  is  lower 
for  women  than  for  men. 

It  is  easy  to  find  answers  to  the  question,  "Why  are  women  paid 
less  than  men  ?"  which  evidently  contain  an  element  of  truth.  Three 
answers  leap  readily  to  the  lips:  "Because  women  cannot  work  so 
hard  or  so  well,"  "Because  women  can  live  upon  less  than  men," 
"Because  it  is  more  difficult  for  a  woman  to  get  wage-work."  Each 
of  these  answers  comprises  not  one  reason  but  a  group  of  reasons  why 
women  get  low  wages,  and  the  difficulty  lies  in  relating  the  different 
reasons  in  these  different  groups  so  as  to  yield  something  that  shall 
approach  an  accurate  solution  of  the  problem.  Setting  these  groups 
in  somewhat  more  exact  language,  we  may  classify  the  causes  as — 

a)  Causes  relating  to  "productivity"  or  efficiency  of  labor. 

b)  Causes  relating  to  "needs"  or  standard  of  comfort. 

c)  Causes  relating  to  character  and  intensity  of  competition. 
Women  do  not  on  the  average  work  so  hard  or  so  well  as  men,  so 

that  if  wages  were  paid  with  sole  reference  to  quantity  and  quality  of 
the  product  of  labor  women  would  get  less.  This  inferiority  in  the 
jiet  efficiency  of  women's  labor  is  partly  due  to  physical,  partly  to 
social,  causes.  The  following  are  the  leading  factors  in  this  inferiority 
of  efficiency: 

(i)  The  physical  weakness  of  woman,  as  compared  with  man, 
closes  many  occupations  to  her.  In  manufactures  the  metal  industries 
have  been  almost  entirely  closed  to  women,  and  most  branches  of  the 
mining  and  railway  industries.  In  England  and  America  the  rougher 
work  of  agriculture  is  almost  wholly  given  over  to  male  labor,  and  in 
several  continental  countries  there  is  a  growing  tendency  to  spare 
women  the  kinds  of  labor  which  tax  the  muscular  forces  most  severely. 
The  growing  consideration  for  the  duties  of  maternity,  operating 
through  public  opinion  and  legislation,  favor  this  curtailment  of 
woman's  sphere  of  activity.  Further,  in  all  employments  where 
physical  strength  is  an  important  factor,  the  net  productivity  of 
woman's  labor  tends  to  fall  below  man's,  although  in  some  cases 
superior  deftness  or  lightness  of  hand  related  to  physical  fragility  may 
compensate.  Even  in  modem  textile  factories  the  superior  force  of 
man's  muscles  often  gives  him  a  great  advantage.  In  fustian  and 
velvet  cutting,  where  the  same  piece-wages  are  paid  to  men  and 
women,  the  actual  takings  of  the  men  are  about  double.     "Every 


650  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

person  has  two  long  frames  upon  which  the  cloth  is  stretched  ready 
for  cutting,  and  while  women  are  unable  to  cut  more  than  one  piece 
at  a  time,  men  can  cut  two  pieces  without  difficulty."' 

Where  physical  strength  is  not  a  prime  factor  it  may  enter  inci- 
dentally. So  even  in  weaving  women  are  under  some  disadvantage 
through  inability  to  work  the  heavy  Jacquard  looms,  and  to  "tune" 
their  looms.* 

Where  manual  work  is  concerned  brute  strength  and  endurance 
form  an  important  ingredient  in  what  is  called  manual  skill,  and  affect 
the  quality  of  the  work  as  well  as  the  pace  and  regularity  of  the 
output.  Though,  as  we  have  seen,  a  chief  object  of  modem  machinery 
is  to  diminish  the  importance  of  this  element,  it  plays  no  inconsiderable 
part  in  affecting  the  quantity  of  work  turned  out  by  women  as  com- 
pared with  men  in  industries  where  the  direct  strain  upon  the  muscles 
is  less  severe. 

(2)  But  even  when  we  take  those  kinds  of  work  where  skill  seems 
least  dependent  upon  physical  force,  men  have  generally  some 
advantage  in  productivity,  though  a  smaller  one.  Where  the  elements 
of  design,  resource,  judgment  enter  in,  the  superiority  of  male  labor 
is  unquestioned,  and  in  occupations  which  demand  these  qualities 
women  are  confined  generally  to  the  lower  routine  portions  of  the 
work.  How  far  these  defects  of  manual  and  intellectual  skill,  which 
generally  prevent  women  from  successfully  competing  in  the  higher 
grades  of  labor,  are  natural,  how  far  the  results  of  defective  education 
and  industrial  training,  we  are  not  called  upon  here  to  consider.  The 
fact  stands  that  women  do  not  work  so  well. 

(3)  The  reluctance  of  male  workers  to  allow  women  to  qualify 
for  and  to  undertake  certain  kinds  of  work  which  men  choose  to 
regard  as  "  their  own,"  though  sometimes  defensible  when  all  the  terms 
of  competition  are  taken  into  account, ^  must  be  held  to  confine  and 
lessen  the  average  productivity  of  female  labor  in  certain  depart- 
ments of  industry.  Closely  allied  to  this  is  the  social  feeling,  partly 
based  upon  the  recognition  of  a  real  difference  of  physical  and  mental 

'  Report  to  Commission  of  Labour  on  Employment  of  Women,  p.  141. 

'  Webb,  Economic  Journal,  I,  p.  658. 

J  Women  sometimes  abuse  the  superior  competitive  powers  contained  in  their 
lower  standard  of  subsistence,  and  the  smaller  number  of  those  dependent  on  them, 
CO  undersell  male  labor.  In  Sheffield  file-making,  where  women  are  paid  the  same 
list  of  prices  as  men,  it  is  said  that  they  practice  sweating  in  their  homes  to  the 
detriment  of  male  workers.    So  in  carpet-weaving  at  Halifax;   recently  when  the 


WAGES  651 

vigor,  partly  upon  prejudice,  which  bars  women  from  the  highly  paid 
and  responsible  posts  of  superintendence  and  control  in  industries 
where  both  sexes  are  employed.  In  a  general  comparison  of  the  male 
and  female  wage  in  a  highly  organized  industry,  the  fact  that  women 
are  held  disqualified  for  all  posts  of  high  emolument  and  responsibility 
has  a  material  effect  upon  the  average  of  wages.  Where  men  and 
women  work  in  the  same  industry,  the  women  are  commonly  confined 
to  the  less  productive  work,  and  where  they  do  the  same  work  they 
seldom  reach  man's  level  in  quantity  and  quality. 

(4)  This  inferior  efficiency  is  not  solely  attributable  to  these 
reasons.  Woman's  incentive  to  acquire  industrial  efficiency  is  not  so 
great  as  man's.  A  large  number  of  women-workers  do  not  enter  an 
industrial  occupation  as  the  chief  means  of  support  throughout  their 
life.  The  influence  of  matrimony  and  domestic  life  operates  in 
various  ways  upon  women's  industry.  The  expectation  of  marriage 
and  a  release  from  industrial  work  must  lessen  the  interest  of  women 
in  their  work.  The  fact  that  even  while  unmarried  a  large  proportion 
of  women-workers  are  not  dependent  upon  their  earnings  for  a  liveli- 
hood will  have  the  same  result.  A  larger  proportion  of  the  woman's 
industrial  career  is  occupied  in  acquiring  the  experience  which  makes 
her  a  valuable  worker,  and  the  probability  that,  after  she  has  acquired 
it,  she  may  not  need  to  use  it  diminishes  both  directly  and  indirectly 
the  net  value  of  her  industrial  life;  the  element  of  uncertainty  and 
instability  prevents  the  advancement  of  competent  women  to  posts 
where  fixity  of  tenure  is  an  important  factor. 

Where  married  women  are  engaged  in  industrial  work  either  in 
factories  or  at  home,  domestic  work  of  necessity  engages  some  of  their 
strength  and  interest,  and  is  liable  to  trench  upon  the  energy  which 
otherwise  might  go  into  industry.  Even  unmarried  women  have 
frequently  some  domestic  work  to  do  which  is  added  to  their  industrial 
work.  Thus  the  incentive  to  efficiency  is  weaker  in  woman,  her 
industrial  position  is  less  stable  and  her  industrial  life  shorter,  while 
part  of  her  energy  is  diverted  to  other  than  industrial  channels. 

(5)  There  is  conclusive  evidence  to  show  that  women  are  more 
often  absent  from  work  owing  to  sickness  and  other  claims  upon  their 

men  struck  against  a  reduction  upon  their  wage  of  35J.,  women  took  the  work  at 
205.  (Lady  Dilke,  "Industrial  Position  of  Women,"  Nineteenth  Century,  October, 
1893).  In  watch-making,  "the  handwork  for  which  men  were  paid  about  18^. 
a  week  is  now  done  by  women  with  machinery  for  about  12s."  {Report  to  Labour 
Commission  on  Women's  Employments,  p.  146). 


6:; 2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 


'D 


time  than  men.'  Though  closely  related  to  the  former  factors  this 
may  be  treated  separately  in  assessing  the  net  productiveness  of 
women,  because  it  is  distinctly  measurable.  But  in  touching  this 
point  it  should  be  remarked  that  weaker  muscular  development  does 
not  necessarily  imply  more  sickness.  The  loss  of  working  time 
sustained  by  women  could  probably  be  reduced  considerably  by  more 
attention  to  physical  training  and  exercise  and  by  a  higher  standard 
of  diet. 

(6)  Although  the  limitations  of  law  and  custom,  which  limit  the 
hours  of  labor  for  women  in  many  of  their  industrial  occupations  and 
forbid  them  to  undertake  night  work,  cannot  be  reasonably  held  to 
reduce  the  net  efficiency  of  women's  labor  taken  as  an  aggregate,  they 
must  be  allowed  to  diminish  the  direct  net  productiveness  of  women 
in  certain  employments  as  compared  with  men,  and  either  to  bar 
them  out  of  these  employments  or  engage  them  upon  lower  wages. 

(7)  Lastly,  the  inferior  mobility  of  woman  as  compared  with  man 
has  an  influence  in  reducing  the  average  efficiency  of  her  labor.  On 
the  one  hand,  women  are  more  liable  to  have  the  locality  of  their  home 
fixed  by  the  requirements  of  the  male  worker  in  the  family;  on  the 
other  hand,  they  are  physically  less  competent  to  undertake  work  far 
from  their  home.  Hence  they  are  far  more  narrowly  restricted  in 
their  choice  of  work  than  men.  They  must  often  choose  not  that 
work  they  like  best,  or  can  do  best,  or  which  is  most  remunerative, 
but  that  which  lies  near  at  hand.  This  restriction  implies  that  large 
numbers  of  women  undertake  low-skilled,  low-paid,  ineffective,  and 
irregular  work  at  their  homes  or  in  some  neighboring  work-room, 
instead  of  engaging  in  the  more  productive  and  more  remunerative 
work  of  the  large  factories.  Every  limitation  in  freedom  of  choice  of 
work  signifies  a  reduction  in  the  average  effectiveness  of  labor. 

These  elements  of  inferior  physique  and  manual  skill,  lower 
intelligence  and  mental  capacity,  lack  of  education  and  knowledge  of 
life,  irregularity  of  work,  more  restricted  freedom  of  choice,  must  in 
different  degrees  contribute  to  the  inferior  productivity  of  woman's 
industrial  labor. 

In  regarding  this  influence  the  experienced  student  of  industrial 
questions  hardly  requires  to  be  reminded  that  these  must  be  regarded 

'  Dr.  Bertillon  {Journal  de  la  socilti  de  slalistique  de  Paris,  October-November, 
1892)  shows  that  among  the  Lyons  silkworkers  (1872-89)  and  in  the  Italian 
Societies  (1881-85)  the  sickness  of  women  is  considerably  greater  than  of  men. 
In  Lyons  9.39  days  as  compared  with  7.81  for  men;  in  Italy  8.5  as  compared 
with  6  6. 


WAGES  653 

not  merely  as  causes  of  low  wages,  but  also  as  effects.  This  constant 
recognition  of  the  interaction  of  the  phenomena  we  are  regarding  as 
cause  and  effect  is  essential  to  a  scientific  conception  of  industrial 
society.  Women  are  paid  low  wages  because  they  are  relatively 
inefficient  workers,  but  they  also  are  inefficient  workers  because  they 
are  paid  low  wages. 

While  this  smaller  productivity  diminishes  the  maximum  wage 
attainable  by  women  as  compared  with  men,  it  is  evident  that  many 
forces  are  at  work  which  tend  to  equalize  the  productivity  of  men  and 
women  in  industry:  the  evolution  of  machinery  adapted  to  the  weaker 
physique  of  women;  the  breakdown  of  customs  excluding  women 
from  many  occupations;  the  growth  of  restrictions  upon  male  adult 
labor  with  regard  to  the  working-day,  etc.,  correspondent  with  those 
placed  upon  women;  improved  mobility  of  women's  labor  by  cheaper 
and  more  facile  transport  in  large  cities;  the  recognition  by  a  growing 
number  of  women  that  matrimony  is  not  the  only  livelihood  open  to 
them,  but  that  an  industrial  life  is  preferable  and  possible.  These 
forces,  unless  counteracted  by  stronger  moral  and  social  forces,  seem 
likely  to  raise  the  average  productivity  of  women's  industrial  labor, 
and  to  incite  her  more  and  more  to  undertake  industrial  wage-work. 

As  the  maximum  wage  may  be  said  to  vary  with  productivity,  so 
the  minimum  wage  is  said  to  vary  with  the  "wants"  of  the  worker. 
Women  are  said  to  "want"  less  than  man,  and  therefore  the  stress  of 
competition  can  drive  their  wages  to  a  lower  level.  It  is  possible  that 
a  woman  can  sustain  the  smaller  quantity  of  physical  energy  required 
for  her  work  somewhat  more  cheaply  than  a  man  can  sustain  the 
energy  required  for  his  work,  and  that  the  early  increments  of  material 
comfort  above  the  bare  subsistence  line  may  be  attended  by  a  larger 
increase  of  productivity  in  the  man  than  in  the  woman.  If  this  is  so, 
then  the  minimum  subsistence  wage  and  the  wage  of  true  economic 
efficiency,  the  smallest  wage  a  wise  employer  in  his  own  interest  will 
consent  to  pay,  are  lower  in  the  case  of  women  than  of  men.  But 
this  difference  furnishes  no  adequate  explanation  of  the  difference 
between  the  male  and  the  female  minimum  wage.  The  wage  of  the 
low-skilled  male  laborer  enables  him  to  consume  certain  things  which 
do  not  belong  strictly  to  his  "subsistence" — to  wit,  beer  and  tobacco; 
the  wage  of  the  low-skilled  female  laborer  often  falls  below  what  is 
sufficient  with  the  most  rigid  economy  to  provide  "subsistence." 
We  are  not  then  concerned  with  a  difference  which  refers  primarily 
to  the  quantity  of  food,  etc.,  required  to  support  life.    The  wages 


6S4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  the  low-skilled  laborer  in  regular  employ  would,  if  properly  used, 
suffice  to  furnish  him  more  than  a  bare  physical  subsistence;  the 
wages  of  the  lowest-paid  women  workers  in  factories  would  not 
suffice  to  maintain  them  in  the  physical  condition  to  perform  their 
work. 

It  is  not  then  precisely  with  the  "standard  of  comfort"  of  male 
and  female  workers  that  we  are  concerned.  The  economic  relation 
in  which  men  and  women  workers  stand  to  other  members  of  their 
family  is  a  more  important  factor.  The  wage  of  a  male  worker  must 
be  sufficient  to  support  not  only  himself  but  the  average  family 
dependent  upon  him,  in  the  standard  of  comfort  below  which  he 
will  not  consent  to  work.  When  little  work  is  available  for  his  wife 
and  children,  or  where  his  "standard  of  comfort"  requires  them  not 
to  undertake  wage-work,  his  minimum  wage  must  suffice  to  keep 
some  four  persons.  His  standard  of  comfort  may  be  beaten  down  by 
stress  of  circumstances,  his  family  may  be  driven  to  take  what 
work  they  can  get,  but  in  any  case  his  wage  must  be  above  the 
"subsistence"  of  a  single  man.  When  the  man  is  the  sole  wage- 
earner,  or  is  only  assisted  slightly  by  his  family,  as,  for  example,  in 
the  metal  and  mining  and  building  industries,  average  male  wages  are 
much  higher  than  in  the  textile  industries,  where  the  women  and 
children  share  largely  in  the  wprk. 

Women  workers,  on  the  other  hand,  have  not  in  most  cases  a 
family  to  support  out  of  their  wages.  In  the  majority  of  instances 
their  own  "sustenance"  does  not  or  need  not  fall  entirely  upon  the 
wages  they  earn.  They  are  partly  supported  by  the  earnings  of  a 
father  or  a  husband  or  other  relative,  upon  some  small  unearned 
income,  upon  public  or  private  charity.  Where  married  women 
undertake  work  in  order  to  increase  the  family  income,  or  where  girls 
not  obliged  to  work  for  a  living  enter  factories  or  take  home  work  to  do, 
there  is  no  ascertainable  limit  to  the  minimum  wage  in  an  industry. 
Grown-up  women  living  at  home  will  often  work  for  a  few  shillings  a 
week  to  spend  in  dress  and  amusements,  utterly  regardless  of  the  fact 
that  they  may  be  setting  the  wage  below  starvation-point  for  those 
unfortunate  competitors  who  are  wholly  dependent  on  their  earnings 
for  a  living.  Even  where  girls  living  at  home  pay  to  their  parents  the 
full  cost  of  their  keep,  the  economy  of  family  life  may  enable  them  to 
keep  down  wages  to  such  a  point  that  another  girl  who  has  to  keep 
herself  alone  may  be  sorely  pressed,  while  a  woman  with  a  family  to 
support  cannot  get  a  living. 


WAGES  6SS 

Miss  Collet,  in  her  investigation  of  women  workers  in  East 
London,  remarked  of  the  shirt-finishers,  one  of  the  lowest  paid  employ- 
ments: "These  shirt-finishers  nearly  all  receive  allowances  from 
relatives,  friends,  and  charitable  societies,  and  many  of  them  receive 
outdoor  relief."*  This  is  true  of  most  of  the  low-paid  work  of  women. 
Even  in  the  textile  factories,  with  the  exception  of  weaving,  most  of 
the  scales  of  wages  are  below  what  would  sufiEce  to  keep  the  recipient 
in  the  standard  of  comfort  provided  by  the  family  wage. 

A  knowledge  of  the  productivity  of  labor  as  measuring  the 
maximum  wage-level,  and  of  "wants"  or  standard  of  comfort  as 
measuring  the  minimum  wage-level,  does  not  enable  us  to  determine 
even  approximately  the  actual  wage-level  in  any  industry.  The  actual 
wage  may  be  fixed  at  any  point  between  the  two  extremes.  So  far  as 
competition  is  an  active  determinant,  everything  will  depend  upon 
the  quantitative  relation  between  supply  and  demand  for  labor. 
When  there  is  a  short  supply  of  labor  available  for  any  work,  wages 
may  rise  to  the  maximum;  when  there  is  more  labor  available  than  is 
required,  wages  will  fall  toward  the  minimum.  But,  as  we  have 
already  admitted,  competition  works  very  slowly  and  inadequately 
in  many  of  the  industries  in  which  women  and  children  are  engaged. 
The  force  of  custom,  assisted  by  ignorance  of  the  labor  market, 
prevents  women  from  taking  advantage  of  an  increased  demand  or  a 
decreased  supply  of  labor  to  lift  this  wage  above  the  customary  level 
toward  the  level  of  productivity.  Women  are  more  contented  to 
live  as  they  have  lived  than  men. 

Those  who  have  investigated  the  conditions  of  women  workers  in 
towns  are  agreed  as  to  the  enormous  influence  of  class  and  aesthetic 
feelings  in  narrowing  the  competition.  This  sensitiveness  of  social 
distinction  in  industrial  work,  based  partly  upon  consideration  of  the 
class  and  character  of  those  employed,  partly  upon  the  skill  and 
interest  of  the  work  itself,  is  a  widespread  and  powerful  influence 
among  women  workers.  It  tends  to  bring  about  that  equalization  of 
wages  in  skilled  and  unskilled  industries  which,  as  we  have  seen, 
practically  exists,  for  if  there  is  an  economic  rise  of  wages  in  the  lower 
grades  of  work,  it  does  not  tempt  the  competition  of  high-skilled 
workers,  while  a  corresponding  rise  in  the  wages  of  the  higher  grades 
would  draw  competitors  from  the  lower  grades  to  qualify  themselves 
for  undertaking  work  which  would  at  once  give  them  more  money  and 
more  social  respect.    The  lower  wages  often  paid  for  more  highly 

'  Labour  and  Life  of  Ihe  People,  I,  410. 


6s6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

skilled  work  simply  mean  that  the  women  take  out  a  larger  portion 
of  their  wage  in  "gentility." 

The  above-mentioned  forces  operate  chiefly  as  barriers  of  free 
economic  competition.  But  women  are  equally  at  a  disadvantage 
when  and  in  so  far  as  they  do  compete  for  work  and  wages.  Weak, 
unorganized  units  of  labor,  they  are  compelled  to  make  terms  with 
large  organized  masses  of  capital.  By  the  organized  action  of  trade 
unionism  the  majority  of  skilled  working  men  have  been  able  to  raise 
their  wages  far  above  the  bare  subsistence  minimum,  and  to  hold  it 
at  the  higher  level  until  a  firm  standard  of  higher  comfort  is  formed  to 
be  a  platform  for  further  endeavor.  With  a  few  significant  exceptions, 
skilled  women  workers  have  been  unable  to  do  the  same.  Instead  of 
presenting  a  firm,  united  front  to  their  employers  in  their  demand  for 
higher  wages,  or  their  resistance  of  a  fall,  they  are  taken  singly  and 
compelled  to  submit  to  any  terms  which  the  employers  choose  to 
impose,  or  custom  appears  to  sanction.  The  consequence  is  that  in 
most  instances  skilled  women  workers  are  paid  very  little  higher 
wages  than  unskilled  women  workers.  The  high  value  due  to  their 
skill  goes  either  to  the  employer  in  high  profits,  or,  where  keen  com- 
petition operates,  to  the  consumer  in  low  prices;  the  woman  who  puts 
out  skill  is  paid  not  according  to  her  worth  but  according  to  her  wants. 
Yet  the  possession  of  technical  skill  is  the  basis  of  trade  organization. 
Wherever  a  number  of  women  workers  possess  a  particular  skill  and 
experience,  and  are  engaged  in  fairly  stable  employment,  the  requisites 
of  effective  trade  organization  exist.  If  they  could  but  combine,  these 
women  could  wield  an  economic  power,  measured  by  the  difficulty 
and  cost  of  dismissing  them  en  masse  and  replacing  them  by  less  skilled 
and  experienced  labor,  which  they  can  use  as  a  lever  to  raise  their 
wages  and  other  conditions  of  employment  by  a  series  of  steps  until 
they  approach  the  maximum  limit  imposed  by  their  productivity. 

This  brings  us  to  the  most  vital  point  in  the  problem  of  the 
industrial  position  of  women.  When  there  is  an  oversupply  of  labor 
qualified  to  compete  for  any  work,  wages  must  fall  to  the  minimum  of 
"wants"  unless  those  in  possession  of  the  work  are  so  strongly  organ- 
ized as  to  prevent  outsiders  from  effectively  competing.  In  a  highly 
skilled  trade  the  workers  may  often  have  a  practical  monopoly  of  the 
skill,  which  gives  them  both  power  to  organize  and  power  when 
organized.  But  in  a  low-skilled  trade,  or  where  employers  are  able  to 
introduce  unlimited  numbers  of  girls  into  the  trade,  there  exists  no 
such  power  to  organize.    Those  who  most  need  organization  are  least 


WA'GES  657 

able  to  organize.  This  is  the  crux  for  low-skilled  male  labor,  and  the 
great  mass  of  women's  industries  are  in  the  same  economic  condition, 
because  the  kind  of  skill  required  is  possessed  or  easily  attainable  by  a 
much  larger  number  of  competitors  for  work  than  are  sufl5cient  to 
meet  the  demand  at  a  decent  wage.  The  deep  abiding  difficulty  in, 
the  way  of  organizing  women  workers  lies  here.  Cut  out  as  they 
are,  by  physical  weakness,  by  lack  of  the  means  of  technical  training, 
in  some  cases  by  organized  opposition  of  male  workers,  or  by  social 
prejudices,  from  competing  in  a  large  number  of  skilled  industries, 
their  competition  within  the  permitted  range  of  occupations  is  keener 
than  among  men:  not  merely  in  the  unskilled  but  in  the  skilled 
industries  the  available  supply  of  labor  is  commonly  far  in  excess  of 
the  demand,  for  the  skill  is  generally  such  as  is  common  to  or  easily 
attainable  by  a  large  number  of  the  sex.  To  this  must  be  added  the 
consideration  that  a  larger  proportion  of  women's  industries  are  con- 
cerned with  the  production  of  luxuries  which  are  peculiarly  subject  to 
fluctuation  of  trade  by  the  elements  of  season,  weather,  fashion,  and 
rise  or  fall  of  incomes.  Finally,  a  much  larger  proportion  of  women's 
work  is  done  in  small  factories,  in  workshops,  and  in  the  home,  under 
conditions  which  are  inimical  to  the  effective  organization  of  the 
workers.  Until  out-work  is  much  diminished,  and  effective  inspection 
and  limitation  of  hours  in  small  workshops  drives  a  much  larger 
proportion  of  women  workers  into  large  factories,  where  closer  social 
intercourse  can  lay  the  moral  foundation  of  trade  organization  in 
mutual  acquaintance,  trust,  and  regard,  there  is  little  prospect  of 
women  being  able  to  raise  their  "  customary  "  wage  considerably  above 
its  present  subsistence  level,  or  to  obtain  any  considerable  alleviation 
of  the  burdensome  conditions  of  excessive  hours  of  labor,  insanitary 
surroundings,  unjust  fines,  etc.,  from  which  many  women  workers 
suffer. 

Women  cannot  in  most  of  their  industries  organize  effectively 
under  present  conditions.  In  each  trade,  therefore,  the  workers 
employed  are  surrounded  by  a  permanent  mass  of  potential  "black 
legs"  willing  to  take  their  labor  from  urgent  need,  ignorance,  or 
thoughtlessness,  and  possessing  or  able  to  attain  the  small  skill 
required.  In  men's  industries,  save  in  the  most  unskilled,  there  is  not 
a  constant  oversupply  of  labor.     In  most  women's  industries  there  is. 

Comparing  women's  wages  with  men's  we  are  now  able  to  sum  up 
as  follows:  The  smaller  productivity  of  woman's  work  makes  the 
possible  maximum  wage  lower;  the  smaller  wants  of  women  make  the 


6s8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

possible  minimum  wage  lower;  the  greater  weakness  of  women  as 
competitors,  arising  chiefly  from  excess  of  supply  of  labor,  makes 
their  actual  wage  approximate  to  the  lower  rather  than  to  the 
higher  level. 

In  regarding  productivity  as  a  measure  of  maximum  wage  it  is 
necessary  to  guard  carefully  against  one  misapprehension.  So  far  as 
we  are  comparing  the  wage  of  men  and  women  engaged  upon  the  same 
work,  the  smaller  wages  of  the  latter  may  easily  be  seen  to  have  some 
relation  to  the  smaller  product  of  their  labor.  But  when  productivity 
is  expressed  in  terms  of  the  selling  value  of  the  work,  no  such  measure- 
ment is  open  to  us.  We  are  thus  thrown  back  on  market  value  and 
are  told  that  the  reason  women  get  so  little  is  that  what  they  make 
fetches  so  low  a  price.  But  the  circularity  of  this  argument  will 
appear  on  revising  the  question  and  asking,  "Why  do  women's 
products  sell  so  cheap  ?"  the  obvious  answer  being,  "Because  the  cost 
of  labor  in  them  is  so  little" — i.e.,  because  women  receive  low  wages. 
But  if  we  refuse  to  take  selling  prices  as  the  measure  of  productivity, 
what  measure  have  we?  No  accurate  measure  of  effort,  skill,  or 
efl5ciency  is  open  if  we  refuse  the  scale  of  the  market  itself.  Yet  if  we 
consider  the  conditions  of  wages  and  prices  in  such  "sweated"  trades 
as  shirt-making,  we  cannot  but  conclude  that  the  consumer  gets  the 
advantage  of  the  "sweating";  that  is  to  say,  a  certain  portion  of  the 
productivity  of  the  workers  passes  to  the  consumer  through  the  agency 
of  low  prices.  That  which  might  have  gone  to  the  shirt-makers  in 
decent  wages  has  gone  to  the  purchaser. 

If  the  above  analysis  is  correct  it  is  not  difference  of  sex  which  is 
the  chief  factor  in  determining  the  industrial  position  of  woman. 
Machinery  knows  neither  sex  nor  age,  but  chooses  the  labor  embodied 
in  man,  woman,  or  child,  which  is  cheapest  in  relation  to  the  degree  of 
its  efiaciency.  Thus  the  causes  which  depress  woman's  industry  are 
chiefly  the  same  which  depress  the  industry  of  low-skilled  men  and 
children.  In  each  case  the  limits  of  productivity  and  "wants"  are 
lower  than  for  skilled  men  workers,  while  the  terms  of  their  com- 
petition keep  their  wages  to  the  lower  level  and  check  the  full  incentive 
to  efficiency.  Setting  aside  the  case  of  children,  who  are  protected 
in  some  degree  from  the  full  effects  of  competition  upon  the  conditions 
of  their  employment,  the  industrial  case  of  women  is  closely  analogous 
to  that  of  low-skilled  men.  The  physical  weakness  of  the  one  cor- 
responds with  the  technical  weakness  of  the  other  so  far  as  efficiency 
b  concerned;   in  both  cases  the  low  standard  of  wants  gives  a  low 


WAGES  659 

minimum  wage,  while  the  excessive  supply  of  labor,  rendering  con- 
certed action  almost  impossible,  keeps  wages  close  to  the  minimum. 
The  growing  tendency  of  modem  industry  to  engage  women  and 
children  away  from  their  homes  is  fraught  with  certain  indirect 
important  consequences.  When  industry  was  chiefly  confined  to 
domestic  handicrafts,  the  claims  of  home  life  constantly  pressed  in  and 
tempered  the  industrial  life.  The  growth  of  factory  work  among 
women  has  brought  with  it  inevitably  a  weakening  of  home  interests 
and  a  neglect  of  home  duties.  The  home  has  suffered  what  the  factory 
has  gained.  Even  the  shortening  of  the  factory  day,  accompanied  as 
it  has  been  by  an  intensification  of  labor  during  the  shorter  hours,  does 
not  leave  the  women  competent  and  free  for  the  proper  ordering  of 
home  life.  Home  work  is  consciously  slighted  as  secondary  in 
importance  and  inferior,  because  it  brings  no  wages,  and  if  not 
neglected  is  performed  in  a  perfunctory  manner,  which  robs  it  of  its 
grace  and  value.  This  narrowing  of  the  home  into  a  place  of  hurried 
meals  and  sleep  is  on  the  whole  the  worst  injury  modern  industry  has 
inflicted  on  our  lives,  and  it  is  difficult  to  see  how  it  can  be  compen- 
sated by  any  increase  of  material  products.  Factory  life  for  women, 
save  in  extremely  rare  cases,  saps  the  physical  and  moral  health  of  the 
family.  The  exigencies  of  factory  life  are  inconsistent  with  the  posi- 
tion of  a  good  mother,  a  good  wife,  or  the  maker  of  a  home.  Save  in 
extreme  circumstances,  no  increase  of  the  family  wage  can  balance 
these  losses,  whose  values  stand  upon  a  higher  qualitative  level. 

190.     TIME  WAGES  AND  PIECE  WAGES' 

The  method  of  payment  of  wages  is  often  a  matter  of  equal  impor- 
tance with  that  of  the  amount  paid.  The  nominal  wages  may  be  far 
from  the  actual  value  received  by  the  workingman,  if  the  methods  by 
which  they  are  paid  are  such  as  to  lend  themselves  to  oppressive  con- 
ditions. 

The  simplest  form  of  payment,  and  that  generally  applicable, 
is  payment  by  the  time  employed,  usually  by  the  week  or  day.  See- 
ing that  workers  differ  much  more  widely  in  the  quantity  and  quality 
of  work  accomplished  in  a  given  time,  than  they  do  in  wages  received, 
and  that  the  same  worker  at  different  times  performs  different  quan- 
tities of  work,  it,  of  course,  follows  that  there  are  wide  varieties  in  the 
rates  of  pay  per  unit  of  effort.     The  fact,  also,  that  competition 

'  From  the  Final  Report  [XIX]  of  the  Industrial  Commission  (1902),  jtp.  735-36. 
[For  a  specimen  schedule  of  piece-wage  rates  see  Selection  198. — Editors,] 


66o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

compels  the  employer  to  reduce  his  costs  in  all  possible  ways,  drives 
him  to  secure,  if  possible,  as  time  goes  on,  more  work  for  the  same 
money,  or  the  same  work  for  less  money.  But,  in  the  case  of  pay- 
ment by  the  time  employed,  there  is  always  uncertainty  regarding 
the  amount  of  work  which  the  employee  will  produce.  Time  work, 
in  order  to  be  reduced  to  the  lowest  basis  of  cost,  requires  constant 
supervision.  The  average  man,  whether  workman  or  professional 
man,  is  eager  to  earn  as  much  as  possible  with  as  much  economy  of 
strength  as  possible.  Hence  the  progress  of  American  industry  has 
been  characterized  quite  largely  by  the  substitution  of  piece  payments 
for  time  payments.  Wherever  it  has  been  possible,  through  a  minute 
division  of  labor,  to  standardize  the  product,  the  piece  system  is 
applicable.  It  does  not  apply  to  artistic  and  diversified  work,  where 
quality  is  desired  but,  operating  upon  the  individual  ambition  of 
each  workman,  with  a  goal  set  before  him  each  day,  the  piece  system 
is  unquestionably  adapted  to  draw  out  his  entire  energies.  It  is 
quite  generally  maintained  by  employers  that  workingmen  paid  by 
the  piece  produce  from  lo  to  25  or  30  per  cent  more  of  a  given  product 
in  a  given  time  than  when  paid  by  the  time.  However,  from  the 
standpoint  of  the  employer,  the  tendency  of  men  paid  by  the  piece 
to  scamp  the  work  is  often  found  to  be  a  disadvantage.  On  this 
account  many  large  employers,  having  tried  the  piece  system  for  a 
time,  have  abandoned  it  and  returned  to  time  payments.  This  they 
found  to  be  necessary  in  order  to  maintain  a  high  standard  in  the 
quality  of  their  output.  The  piece  system,  for  the  time  being, 
enabled  them  to  measure  up  the  possible  energies  of  their  employees, 
and  when  once  they  had  in  this  way  touched  bottom  and  established 
a  standard,  they  were  able  thenceforth  to  apply  this  standard  to 
the  time  system. 

From  the  standpoint  of  the  workingman  the  piece  system  is 
usually  considered  the  greatest  disadvantage.  It  unquestionably 
often  leads  to  overexertion,  which  exhausts  the  body  and  mind,  and 
shortens  the  trade  life  of  the  worker.  Various  witnesses  before  the 
Industrial  Commission  have  emphasized  this  feature.  Especially, 
however,  is  the  piece  system  considered  an  injury  because  it  is  hkely 
to  result  in  repeated  reductions  of  the  price  per  piece.  The  employer 
judges  his  entire  staff  by  the  speed  of  the  most  rapid,  and  conse- 
quently, by  showing  up  the  earnings  of  his  best  men,  is  able  to  present 
a  strong  argument  for  reduction  along  the  entire  line.  It  is  unques- 
tionably true  that  there  are  in  all  occupations  wide  ranges  of  ability 


WAGES  661 

among  men  employed  on  the  same  work,  and  those  who  acquire 
exceptional  speed  are  few.  Their  names  and  records  are  well-known 
throughout  the  trade  or  locality.  When  this  minority  is  taken  as  a 
standard  and  the  wages  of  all  reduced  proportionally,  the  piece 
system  undoubtedly  becomes  not  merely  a  means  of  greater  economy, 
but  also  a  means  of  oppression  and  exploitation. 

Again,  the  piece  system  is  often  the  means  of  keeping  idle  an 
oversupply  of  employees.  A  larger  number  than  is  necessary  to 
do  the  work  is  kept  on  the  rolls.  There  are,  however,  various  classes 
of  workers,  like  the  shoe  workers  and  weavers,  who  occasionally 
demand  the  piece  system  in  place  of  the  time  system.  These  are 
occupations  where,  by  speeding  up  the  machinery,  a  greater  output 
can  be  obtained,  and  if  the  price  paid  is  not  based  on  the  piece,  the 
worker  does  not  share  in  the  advantage  of  the  increased  speed. 

It  must  be  noted,  however,  that  the  time  system  also  under 
certain  conditions  may  become  a  system  of  driving  and  overexertion. 
This  is  true  in  those  unorganized  trades,  like  the  clothing  trade,  or 
trades  where  women  and  children  are  employed,  in  which  individual 
bargains  are  made.  Since  in  such  trades  there  is  no  minimum  scale 
of  wages,  the  high  standard  of  output  of  the  more  rapid  worker  is 
applied  to  those  who  are  slower,  and  the  time  wages  are  reduced 
accordingly.  The  time  system  must  necessarily,  in  the  long  run, 
under  economical  management,  become  practically  a  piece  system. 
This  is  true  even  though  it  does  not  necessarily  become  a  task  system 
where  the  worker  is  required,  as  often  happens  in  the  clothing  trade, 
to  turn  out  a  given  quantity  of  goods  for  the  standard  wages  in  a  given 
time. 

191.    WAGE  SYSTEMS  AND  LABOR  MANAGEMENT' 

We  come  to  the  special  systems  designed  to  correct  or  to  reduce 
greatly  the  evils  of  the  straight  day  wage  and  the  straight  piece  rate. 
The  principal  of  these  are  the  Halsey  premium  plan,  the  Taylor 
differential  piece  rate,  the  Gantt  bonus  system,  and  the  Emerson 
efficiency  or  individual-effort  system.  They  are  placed  in  this  order 
for  reasons  that  will  appear  as  we  go  on.  And  the  Halsey  premium 
plan  is  placed  first  because  it  is  simply  and  only  a  wage  system,  while 
the  others  are  rather  parts  of  philosophies  and  methods  of  handling 
labor  in  which  the  wage  system  is  only  one  element. 

'  Adapted  from  C.  B.  Going,  Principles  of  Industrial  Engineering,  pp.  125-42. 
The  McGraw-Hill  Book  Co.,  1911. 


662  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  Halsey  premium  plan  bears  the  strong  impress  of  intimate 
familiarity  with  the  shop — of  complete  knowledge  of  the  traditions 
of  the  shop,  the  suspicions  of  the  shop  men,  and  the  weaknesses  of 
shop  managers;  and  it  seems  to  be  marked  further  by  a  convic- 
tion of  the  strength  of  these  long-established  institutions  and  by  a 
tenderness  toward  disturbing  or  offending  them.  It  is,  in  short,  a 
characteristically  well-informed  effort  to  get  good  results,  to  bring 
about  better  conditions,  without  making  any  trouble. 

The  essence  of  the  Halsey  premium  system  is  to  pay  men  the 
established  day  wage  under  any  circumstances,  and  then  to  reward 
them  further  by  a  voluntary  extra  payment  if  they  do  better  than 
the  established  record  of  past  performances.  When  the  system  is 
introduced  there  is  no  necessary  or  conspicuous  change  from  the  way 
things  have  always  been  done.  Every  man  gets  his  regular  day  wages 
on  pay  day  exactly  as  before.  But  by  reference  to  past  records 
standard  times  are  set  for  the  various  operations  upon  which  the 
workmen  are  engaged.  In  setting  these  standard  times  some  allow- 
ance may  be  made  for  the  probable  shortening  of  the  old  records  under 
the  incentive  the  premium  system  is  going  to  offer;  but  in  the  main 
the  controlling  consideration  is,  how  long  did  the  job  take  on  the 
average  when  it  was  done  by  good  workmen  in  the  past  ?  These 
standard  times  are  tabulated,  recorded  in  the  ofl5ce  for  reference,  and 
the  times  taken  by  the  men  day  by  day  in  doing  these  same  jobs,  or 
performing  the  same  operations,  are  compared  with  these  standards. 
When  any  man  shortens  the  standard  time  on  any  job  after  the  plan 
has  been  put  in  force,  he  is  credited  with  a  premium,  which  is  equal 
to  his  wages  at  his  regular  hourly  rate  for  a  portion  of  the  time  he 
saved  on  the  job.  This  portion  is  usually  either  30  or  50  per  cent  of 
the  time  saved.  The  idea  of  granting  only  part  of  the  saved  time  to 
the  workman  is  twofold.  First,  he  uses  the  shop  facilities  harder — 
uses  more  power,  wears  out  more  tools,  etc.,  and  so  the  shop  should 
have  part  of  the  gain ;  second,  as  the  employer  thus  profits  as  well  as 
the  man,  he  is  less  likely  to  be  tempted  to  cut  rates  when  the  time  is  a 
good  deal  shortened. 

Halsey  puts  no  upper  limit  on  a  workman's  earnings.  However 
much  the  man's  skill  and  ingenuity  may  shorten  the  times  he  gets  his 
regular  proportion  of  the  gain.  One  objection  sometimes  raised  to 
the  plan  is  that  as  the  times  are  not  scientifically  set  (that  is,  as  the 
operations  are  not  scientifically  studied  and  figured  down  to  the  short- 
est practicable  time),  they  may  sometimes  prove  to  be  very  much 


WAGES  663 

in  error  against  the  shop,  and  the  discovery  that  they  are  and  that  the 
men  in  consequence  are  making  very  high  premiums  may  tempt  the 
employer  to  cut  them  down,  something  in  the  same  way  as  piece  rates 
are  so  often  cut  down. 

James  Rowan,  a  member  of  a  prominent  firm  of  engine  builders 
in  Glasgow,  has  put  forth  a  modification  of  the  premium  plan,  gener- 
ally known  as  the  Rowan  premium,  which  has  as  one  of  its  principal 
objects  the  protection  of  the  shop  against  such  mistakes  as  are  re- 
ferred to  in  the  preceding  paragraph.  The  fundamental  principle 
of  the  Rowan  premium  plan  is  that  under  no  circumstances  can  the 
workman  make  more  than  double  his  regular  day  wages.  Under  the 
Rowan  system  the  time  saved  is  converted  into  a  percentage  of  the 
standard  time.  The  workman  then  receives,  as  a  premium,  this  same 
percentage  of  the  time  he  actually  took.  Another  way  of  defining 
the  Rowan  premium  takes  the  form  of  the  equation : 

-=-. XTime  taken  =  Premium. 

Imie  set 

The  system  is  regarded  with  a  good  deal  of  favor  in  England,  but 
it  is  not  much  used  in  the  United  States.  It  pays  the  workman  more 
largely  than  the  Halsey  plan  for  the  earlier  (and  easier)  savings,  but 
as  the  base  upon  which  the  premium  is  calculated  shrinks  constantly 
as  time  is  saved,  the  man's  profit  from  large  savings  of  time  decreases 
proportionately.  The  actual  premium  is  the  same  at  90  per  cent  time 
saved  as  at  10  per  cent.  There  are  some  other  special  modifications 
of  the  premium  plan  in  use,  but  it  is  not  important  to  include  them 
here. 

Proceeding  now  from  the  wage  systems  which  are  merely  modes  of 
payment — that  is,  which  do  not  go  beyond  the  concept  of  enlisting 
the  workman's  interest  through  the  medium  of  his  compensation — 
we  come  to  another  group  of  methods  in  which  the  manner  of  pay- 
ment is  only  one  feature  of  a  policy  of  management,  embodying  many 
other  ideas  and  principles. 

Prominent  among  these  as  one  of  the  early  and  very  widely  noticed 
applications  of  the  ideas  upon  which  other  systems  of  very  different 
philosophy  have  been  built,  is  the  Taylor  differential  piece  rate. 

Taylor  begins  by  an  ultimate  analysis  of  the  job  into  its  elements. 
Each  of  these  elements  is  then  subjected  to  thorough  expert  study  to 
determine  the  methods  and  appliances  by  which  a  man  working 
steadily  at  a  pace  he  can  maintain  without  injury  can  reach  maximum 
performance  and  minimum  time.     The  workman  is  then  provided 


664  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

with  e^'e^}'thing  necessary  to  accomplish,  in  the  standard  time,  the 
results  determined  by  this  study,  and  he  is  thoroughly  instructed  in 
every  step  of  the  operation  by  minutely  detailed  written  schedules  and 
by  expert  advisers. 

Finally,  he  is  paid  at  piece  rates  which  are  set  at  two  different 
levels — a  low  price  per  piece  if  the  workman  fails  to  do  the  job  in  the 
standard  time,  and  a  high  price  per  piece  if  he  does  it  in  the  standard 
time.  This  is  the  so-called  dififerential  rate.  The  successful  worker  is 
paid  not  only  for  the  more  pieces  he  turns  out,  but  he  is  also  paid  moi:e 
for  each  piece.  The  unsuccessful  worker  not  only  makes  less  pieces 
to  be  paid  for,  but  he  is  paid  less  for  each  piece  of  the  smaller  number 
he  makes.  The  money  gain  to  the  man  who  attains  standard  per- 
formance thus  becomes  very  large. 

The  bonus  plan  worked  out  by  H.  L.  Gantt,  an  associate  of  Mr. 
Taylor,  has  rather  more  elasticity  and  has  found  highly  successful 
application.  Like  Taylor,  Gantt  begins  with  standardization  of  con- 
ditions and  accurate  time  study.  That  is,  he  makes  it  possible  for  the 
man  to  work  fast,  and  decides  as  nearly  as  possible  just  how  fast  the 
man  should  work.  The  initial  engagement  of  the  workman,  however, 
is  on  a  day-pay  basis.  The  workman  is  sure  of  regular  day  wages  as 
a  minimum.  Under  the  Taylor  piece  rate,  or  any  piece  rate,  the 
minimum  as  well  as  the  maximum  depends  on  the  number  of  pieces 
made.  If  a  man  is  unlucky  and  does  not  finish  even  one  piece  he 
gets  nothing.  Under  the  Gantt  system  he  gets  day  wages  however 
little  he  may  produce.  The  computations  for  extra  or  bonus  payment 
thereafter  are  on  the  basis  of  time.    To  use  Mr.  Gantt's  own  words: 

"  Under  this  system  each  man  has  his  work  assigned  to  him  in  the 
form  of  a  task  to  be  done,  by  a  prescribed  method,  with  definite 
appliances,  and  to  be  completed  within  a  certain  time.  The  task  is 
based  on  a  detailed  investigation  by  a  trained  expert  of  the  best 
method  of  doing  the  work;  and  the  task-setter,  or  his  assistant,  acts 
as  an  instructor  to  teach  the  workmen  to  do  the  work  in  the  manner 
and  time  specified.  If  the  work  is  done  within  the  time  allowed  by 
the  expert,  and  is  up  to  the  standard  for  quality,  the  workman 
receives  extra  compensation  (usually  20  to  50  per  cent  of  the  time 
allowed)  in  addition  to  his  day's  pa)'.  If  it  is  not  done  in  the  time  set, 
or  is  not  up  to  the  standard  for  quality,  the  workman  receives  his 
day's  pay  only. 

"The  system  is  thus  in  effect  a  combination  of  the  day-rate  and 
piece-work  systems.     While  learning  to  do  his  task  the  workman  is 


WAGES  66s 

on  a  day  rate;  when  he  has  learned  to  do  it  the  compensation  for 
the  task  is  a  fixed  quantity,  really  equivalent  to  piece-rate.  The 
method  of  payment,  then,  is  day  rate  for  the  unskilled  and  piece 
work  for  the  skilled." 

Because  Halsey  and  Gantt  both  grant  day  wages  as  a  minimum 
and  add  something  more  if  a  man  exceeds  standard  performance, 
there  is  an  unfortunately  general  but  ill-informed  impression  that  the 
systems  are  much  alike.  Psychologically — that  is,  in  their  interpre- 
tation of  an  appeal  to  human  emotions — they  are  almost  diametrically 
unlike.  They  seek  similar  results  (an  increase  of  production)  and 
they  offer  a  similar  reward  (pay  for  time  saved)  but  by  contradictory 
policies.  Halsey  is  so  desirous  not  to  "stir  up  things"  that  he 
scarcely  lets  the  men  know  that  times  are  being  studied.  Gantt 
is  so  desirous  to  make  large  output  possible  that  he  would  make 
most  radical  and  far-reaching  changes  if  necessary  to  remove  causes  of 
inefficiency.  Halsey  relies  entirely  on  the  workman's  ability  to  find 
ways  of  shortening  the  standard  time.  Gantt  analyzes  each  job 
scientifically,  resolves  it  into  its  elements,  determines  the  best  way 
and  the  minimum  time  for  performing  each,  and  will  not  even  let  a 
workman  try  to  earn  bonus  until  the  man  has  been  thoroughly 
instructed  by  an  expert.  Halsey  abhors  the  idea  of  setting  any  "  task  " 
as  the  limit  a  man  must  reach.  Gantt  glories  in  the  "task"  as  a 
stimulus  to  effort,  and  makes  such  a  task  the  goal  a  man  must  reach 
before  bonus  begins.  Halsey  tempts  the  man  on  by  at  least  a  small 
premium  for  even  a  trifling  gain  in  the  time  used.  Gantt  gives  no 
bonus  until  a  very  large  gain  necessary  to  reach  his  task  limit  has  been 
made,  and  then  he  gives  a  great  big  bonus — 25  per  cent  or  50  per  cent 
all  at  once. 

Halsey  avoids  class  distinctions  by  making  the  passage  from  day- 
wage  earnings  only  to  premium  earnings  a  progress  of  insensible 
gradations.  Gantt  emphasizes  class  distinction  not  only  by  the  sharp 
and  wide  break  between  day  wages  and  bonus  earning,  but  also  by 
encouraging  outward  signs  and  symbols  of  bonus  earning — encoura- 
ging the  group  of  bonus  workers  and  the  creation  of  a  bonus  society, 
entry  into  which  is  a  desirable  goal  for  those  who  are  still  in  the 
no-bonus  class. 

These  things  are  really  more  important  in  dealing  with  men  than 
questions  of  20  per  cent,  or  30  per  cent,  or  50  per  cent  premium; 
and  in  these  things  the  philosophies  of  Gantt  and  Halsey  take  widely 
different  and  opposing  views. 


666  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  Emerson  eflficiency  or  individual-efifort  system  has  certain 
resemblances  to  both  the  Halsey  premium,  and  the  Gantt  bonus  plans. 
It  recognizes  that  there  is  truth  in  the  psychology  of  both  these  sys- 
tems, different  as  they  are  psychologically,  and  it  recognizes  advan- 
tages in  both  their  methods.  Nevertheless,  although  it  has  these 
resemblances  it  proceeds  by  a  philosophy  and  a  plan  of  its  own,  which 
is  distinct  and  characteristic. 

To  begin  with,  it  establishes  the  regular  daily-wage  scale  and 
system  as  the  basis  of  employment,  thus  agreeing  with  both  Halsey 
and  Gantt.  Next,  it  prescribes  the  standard  of  production  after 
scientific  study,  and  offers  a  rather  large  bonus  for  reaching  it,  thus 
agreeing  with  Gantt;  but  it  leads  up  to  this  bonus  reward  by  a 
graduated  scale  of  smaller  bonuses,  thus  approaching  the  Halsey 
premium  plan. 

To  take  up  its  features  in  greater  detail,  let  us  go  back  to  the 
measures  preliminary  to  the  introduction  of  the  system.  As  in  the 
case  of  the  Taylor  and  Gantt  policies  already  described,  the  arrange- 
ment, equipment,  and  working  conditions  in  the  shop  or  factory  are 
standardized  to  secure  the  utmost  efficiency  and  to  prevent  all  wastes 
and  losses  that  are  preventable.  Standard  times  for  every  operation 
are  then  determined  and  scheduled  by  the  most  careful  study.  In 
setting  these  times  Emerson  apparently  gives  more  weight  to  averaged 
past  experience  than  Taylor  or  Gantt,  but  is  not  so  closely  governed 
by  it  as  Halsey.  Taylor  and  Gantt,  indeed,  are  inclined  to  proceed 
without  much  regard  to  what  has  been  the  practice  in  any  particular 
case.  They  go  back  to  the  very  best  way  of  doing  the  thing,  and 
having  determined  this  scientifically  for  every  element,  they  add 
these  elementary  operation  times  together,  allow  a  certain  factor  for 
what  might  be  called  the  human  equation — that  is,  a  margin  by  which 
the  workman  may  be  permitted  to  fall  short  of  perfection — add  per- 
haps another  factor  for  imperfection  of  materials,  and  so  arrive  at  a 
final  result.  Halsey  is  disposed  to  make  good  existing  shop  practice 
the  standard  and  not  to  go  very  far  back  of  that  in  setting  standard 
times,  but  to  rely  largely  on  the  skill  and  effort  of  the  individual  work- 
man for  finding  ways  of  bettering  the  old  records.  Emerson's  policy 
inclines  rather  to  the  method  of  taking  such  records  as  Halsey  would 
accept  as  standards,  and  refining  down  by  deducting  for  the  pre- 
ventable wastes  and  losses  that  have  been  occurring  and  that  are  to 
be  eliminated  by  the  improvements  installed.  This  method,  as  will 
be  seen,  goes  upon  the  supposition  that  if  you  take  practice  as  it  is,  and 


WAGES  667 

correct  it  for  all  the  errors  and  inefficiencies  you  can  discover  and 
identify,  the  residue  will  be  automatically  self-corrected  with  such 
inherent,  necessary,  and  unpreventable  inefficiencies  and  wastes  as 
are  innate  in  conditions  and  undiscoverable  by  inspection. 

Under  the  efficiency  system,  if  a  workman  finishes  a  job  or  an 
operation  in  the  standard  time  which  has  been  fixed,  he  receives  a 
bonus  of  20  per  cent.  This  rate  is  about  the  same  as  the  lower  limit 
usually  adopted  by  Gantt.  The  Emerson  bonus  for  standard  per- 
formance, however,  is  always  20  per  cent,  while  Gantt  varies  somewhat 
with  the  agreeableness  and  disagreeableness  of  the  work,  occasionally 
running  as  high  as  50  per  cent  and  probably  averaging  from  30  to  40. 
Under  the  efficiency  plan,  however,  if  the  workman  reaches  two-thirds 
of  the  standard  performance  (that  is,  if  he  finishes  the  job  in  one  and 
a  half  times  the  standard  time)  he  reaches  a  point  beyond  which  he 
begins  to  receive  a  little  extra  reward,  increasing  gradually  like  the 
Halsey  premium.  This  reward,  however,  instead  of  rising  at  a 
uniform  rate  as  the  Halsey  premium  does,  rises  on  a  sliding  scale.  It 
rises,  in  fact,  as  a  function  of  a  parabola,  the  performance  being 
measured  along  the  curve  and  the  bonus  being  apportioned  according 
to  the  ordinate.  This  makes  the  bonus  very  small  indeed  for  the 
early  savings  of  time  below  time  and  a  half.  It  merges  into  the  20 
per  cent  bonus  at  standard  performance.  For  still  further  reductions 
of  time,  that  is,  for  doing  the  work  in  less  than  standard  time  set,  the 
workman  gets  the  20  per  cent  bonus,  pliis  all  the  time  that  he  saves. 


XVI.    LABOR  PROBLEMS 

192.    PURPOSES  OF  THE  AMERICAN  FEDERATION  OF  LABOR 

A  Few  of  Its  Declarations  upon  Which  It  Appeals  to  All 

Working  People  to  Organize,  Unite,  Federate,  and 

Cement  the  Bonds  of  Fraternity" 

1.  The  abolition  of  all  forms  of  involuntary  servitude,  except  as 
a  punishment  for  crime. 

2.  Free  schools,  free  textbooks,  and  compulsory  education, 

3.  Unrelenting  protest  against  the  issuance  and  abuse  of  injunction 
process  in  labor  disputes. 

4.  A  workday  of  not  more  than  eight  hours  in  the  twenty-four 
hour  day. 

5.  A  strict  recognition  of  not  over  eight  hours  per  day  on  all 
federal,  state,  or  municipal  work  and  at  not  less  than  the  prevailing 
per  diem  wage  rate  of  the  class  of  employment  in  the  vicinity  where  the 
work  is  performed. 

6.  Release  from  employment  one  day  in  seven. 

7.  The  abolition  of  the  contract  system  on  public  work. 

8.  The  municipal  ownership  of  public  utilities. 

9.  The  abolition  of  the  sweat-shop  system. 

10.  Sanitary  inspection  of  factory,  workshop,  mine,  and  home. 

11.  Liability  of  employers  for  injury  to  body  or  loss  of  life. 

12.  The  nationalization  of  telegraph  and  telephone. 

13.  The  passage  of  anti-child  labor  laws  in  states  where  they  do  not 
exist  and  rigid  defense  of  them  where  they  have  been  enacted  into  law. 

14.  Woman  suffrage  coequal  with  man  suffrage. 

15.  Suitable  and  plentiful  playgrounds  for  children  in  all  cities. 

16.  The  initiative  and  referendum  and  the  imperative  mandate 
and  right  of  recall.    - 

17.  Continued  agitation  for  the  public  bath  system  in  all  cities. 

18.  Qualifications  in  permits  to  build,  of  all  cities  and  towns,  that 
there  shall  be  bathrooms  and  bathroom  attachments  in  all  houses  or 
compartments  used  for  habitation. 

19.  We  favor  a  system  of  finance  whereby  money  shall  be  issued 
exclusively  by  the  government,  with  such  regulations  and  restrictions 

'  From  official  literature  of  the  American  Federation  of  Labor. 

668 


LABOR  PROBLEMS  669 

as  will  protect  it  from  manipulation  by  the  banking  interests  for  their 
own  private  gain 

The  above  is  a  partial  statement  of  the  demands  which  organized 
labor,  in  the  interest  of  the  workers — aye,  of  all  the  people  of  our 
country — makes  upon  modern  society. 

Higher  wages,  shorter  workday,  better  labor  conditions,  better 
homes,  better  and  safer  workshops,  factories,  mills,  and  mines.  In 
a  word,  a  better,  higher,  and  nobler  hfe. 

Conscious  of  the  justice,  wisdom,  and  nobility  of  our  cause,  the 
American  Federation  of  Labor  appeals  to  all  men  and  women  of  labor 
to  join  with  us  in  the  great  movement  for  its  achievement. 

More  than  two  milHon  wage-earners  who  have  reaped  the  advan- 
tages of  organization  and  federation  appeal  to  their  brothers  and 
sisters  of  toil  to  unite  with  them  and  participate  in  the  glorious 
movement  with  its  attendant  benefits 

We  have  nearly  1,000  volunteer  and  special  organizers  as  well  as 
the  officers  of  the  unions  and  of  the  American  Federation  of  Labor 
itself  always  wilUng  and  anxious  to  aid  their  fellow- workmen  to  organ- 
ize and  in  every  other  way  better  their  conditions. 

For  information  all  are  invited  to  write  to  the  American  Federation 
of  Labor  headquarters  at  Washington,  D.C. 

Wage- workers  of  America,  unite! 


193.    STRUCTURE  OF  THE  AMERICAN  FEDERATION  OF 

LABOR' 


Membership 
^American  Federation 

of  Labor 

Sepiember  30,1312 

1,84I,2B8 


Jfepartments/* 


41 

State  rBderaliQns) 


^Looal  Oepartiiunt 
Councils 


20,964 

Local  Unions 


'  From  the  Report  of  the  Proceedings  of  the  Thirty-second  Annual  Convention 
of  the  American  Federation  of  Labor  (iQi  2).  D.  82. 


LABOR  PROBLEMS 


671 


194.    AVERAGE  MEMBERSHIP  IN  THE  AMERICAN  FEDER- 
ATION OF  LABOR,  AS  REPORTED  OR  PAID  UPON 
FOR  EACH  OF  THE  YEARS  1897-1912^ 

1897 264,825 

1898 278,016 

1899 349,422 

1900 548,321 

1901 787,537 

1902 1,024,399 

1903 1,465,800 

1904 1,676,200 

190S 1,494,300 

1906 1,454,200 

1907 1,538,970 

1908 1,586,885 

1909 1,482,872 

1910 1,562,112 

1911 1,761,83s 

1912 1,770,14s 


195.    UNION  CHARTERS  ISSUED  BY  THE  AMERICAN 
FEDERATION  OF  LABOR,  i897-i9i2» 


Year 


1897 

1898 

1899. •• 

igoo 

1901 

1902  (eleven  months) 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

1912 


Inter- 
national 


8 

9 

9 

14 

7 

14 

20 

ir 

3 
6 

3 
o 

3 
2 

3 
2 


Depart- 
ment 


2 
2 
O 
O 
I 


State 


2 
o 

I 

S 
4 
6 

3 
S 

I 

4 

I 

4 
2 

I 
o 
2 


Central 


18 
12 

35 

96 

123 

127 

171 

99 
67 

53 

72 

73 
40 

83 
6i 

57 


Trade 
Unions 


154 
129 

303 
484 
575 
598 
743 
179 

143 
167 
204 
100 
77 
152 
207 
149 


Federal 
Unions 


35 
53 

lOI 

250 
207 
279 
396 
149 

73 
87 
93 
55 
52 
96 

55 
49 


Total 


217 
203 

449 
849 
916 
1,024 
1,333 
443 
287 

317 
373 

234 
176 

334 
326 
260 


'  From  the  Report  of  the  Proceedings  of  the  Thirty-second  Annual  Convention  of 
the  American  Federation  of  Labor  (191 2),  p.  80. 

*Ihid.,  p.  63. 


672  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

196.    EXTRACTS    FROM    THE    CONSTITUTION    OF    INTERNA- 
TIONAL UNION  UNITED  MINE  WORKERS  OF 
AMERICA,  REVISION  1908 

Preamble 

We  hereby  declare  to  the  world  that  our  objects  are — 

First — To  secure  an  earning  fully  compatible  with  the  dangers  of 
our  calling  and  the  labor  performed. 

Second — To  establish  as  speedily  as  possible,  and  forever,  our 
right  to  receive  pay,  for  labor  performed,  in  lawful  money,  and  to 
rid  ourselves  of  the  iniquitous  S3''stem  of  spending  our  money  wherever 
our  employers  see  fit  to  designate. 

Third — To  secure  the  introduction  of  any  and  all  well-defined 
and  established  appliances  for  the  preservation  of  life,  health,  and 
limbs  of  all  mine  employees. 

Fourth — To  reduce  to  the  lowest  possible  minimum  the  awful 
catastrophies  which  have  been  sweeping  our  fellow- craftsmen  to 
untimely  graves  by  the  thousands;  by  securing  legislation  looking 
to  the  most  perfect  system  of  ventilation,  drainage,  etc. 

Fifth — To  enforce  existing  laws;  and  where  none  exist,  enact  and 
enforce  them;  calling  for  a  plentiful  supply  of  suitable  timber  for 
supporting  the  roof,  pillars,  etc.,  and  to  have  all  working  places  ren- 
dered as  free  from  water  and  impure  air  and  poisonous  gases  as 
possible. 

Sixth — ^To  uncompromisingly  demand  that  eight  hours  shall  con- 
stitute a  day's  work,  and  that  not  more  than  eight  hours  shall  be 
worked  in  any  one  day  by  any  mine  worker.  The  very  nature  of  our 
emplojTuent,  shut  out  from  the  sunhght  and  pure  air,  working  by 
the  aid  of  artificial  light  (in  no  instance  to  exceed  one  candle  power), 
would,  in  itself,  strongly  indicate  that,  of  all  men,  a  coal  miner  has  the 
most  righteous  claim  to  an  eight-hour  day. 

Seventh — To  provide  for  the  education  of  our  children  by  lawfully 
prohibiting  their  employment  until  they  have  attained  a  reasonably 
satisfactory  education,  and  in  every  case  until  they  have  attained 
fourteen  years  of  age. 

Eighth — To  abrogate  all  laws  which  enable  coal  operators  to  cheat 
the  miners,  and  to  substitute  laws  which  enable  the  miner,  under  the 
protection  and  majesty  of  the  state,  to  have  his  coal  properly  weighed 
or  measured,  as  the  case  may  be. 

Ninth — To  secure,by  legislation,  weekly  payments  in  lawful  money. 


LABOR  PROBLEMS  673 

Tenth — ^To  render  it  impossible,  by  legislative  enactment  in  every 
state,  for  coal  operators  or  corporations  to  employ  Pinkerton  detect- 
ives or  guards,  or  other  forces  (except  the  ordinary  forces  of  the 
state)  to  take  armed  possession  of  the  mines  in  cases  of  strikes  or 
lockouts. 

Eleventh — ^To  use  all  honorable  means  to  maintain  peace  between 
ourselves  and  employers;  adjusting  all  differences,  so  far  as  possible, 
by  arbitration  and  conciliation,  that  strikes  may  become  unnecessary. 

Constitution 

article  i 

Name,  Objects,  and  Jurisdiction 

Section  i.  This  organization  shall  be  known  as  the  United  Mine 
Workers  of  America. 

Sec.  2.  The  objects  of  this  Union  are  to  unite  mine  employees 
that  produce  or  handle  coal  or  coke  in  or  around  the  mines,  and 
ameliorate  their  condition  by  methods  of  conciliation,  arbitration, 
or  strikes. 

Sec.  3.  This  organization  shall  be  composed  of  International, 
District,  Sub-Distrfct,  and  Local  Unions. 

Sec.  4.  The  International  Union  shall  have  jurisdiction  over  all 
Districts,  Sub-Districts,  and  Local  Unions,  which  shall  be  governed 
by  this  Constitution. 

article  n 
Officers  and  Their  Duties 

Section  i.  The  ofl5cers  of  the  Union  shall  be  one  President,  one 
Vice-President,  one  Secretary-Treasurer,  and  an  Executive  Board 
to  be  composed  of  one  member  from  each  district  under  the  jurisdic- 
tion of  the  United  Mine  Workers,  each  district  to  elect  its  members 
of  the  International  Executive  Board,  the  President,  Vice-President, 
and  Secretary-Treasurer  to  be  members  of  the  board  by  reason  of 
their  position. 

Sec.  2.  The  President  shall  preside  at  all  general  conventions  of 
the  Union  and  meetings  of  the  International  Executive  Board;  he 
shall  sign  all  bills,  and  official  documents,  when  satisfied  of  their 
correctness;  he  shall,  with  the  consent  of  the  Executive  Board,  fill, 
by  appointment,  all  vacancies  occurring  in  any  International  office, 
and  in  like  manner  may  suspend  or  remove  any  International  officer 


674  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

for  insubordination,  or  just  and  suflScient  cause;  he  shall,  with  the 
consent  of  the  Executive  Board,  appoint  a  man,  whose  duty  shall  be 
to  collect  and  compile  statistics  on  the  production,  distribution,  con- 
sumption, freight  rates,  market  conditions,  and  any  other  matters  of 
interest  connected  with  the  coal  trade,  and  from  time  to  time  appoint 
such  organizers  and  workers  in  the  International  oflSce  or  in  the  field 
as  may  be  required;  he  shall  send  out  in  circular  form  to  all  Locals 
six  weeks  previous  to  International  Convention,  such  recommenda- 
tions as  he  may  deem  wise,  to  be  acted  on  at  International  Conven- 
tion, so  delegates  to  said  convention  may  have  the  advice  of  their 
respective  locals  on  such  recommendations;  he  may  attend  in  person 
or  send  an  International  officer  to  visit  Local  Unions,  District  and  Sub- 
District  conventions,  and  any  other  places  connected  with  the  United 
Mine  Workers  of  America,  when  convinced  that  such  services  are 
required;  he  may  appoint  one  or  more  officers  or  members,  when 
deemed  necessary,  whose  duty  will  be  to  examine  the  financial  accounts 
of  any  Local  Union,  instruct  the  officers  in  the  discharge  of  their 
duties,  and  report  to  the  President  the  standing  of  each  Local  Union 
visited;  he  shall  devote  his  time  and  attention  to  the  affairs  of  the 
Union ;  decide  all  questions  of  dispute  concerning  the  meaning  of  the 
Constitution,  and  exercise  general  supervision  over  its  workings,  both 
in  the  field  and  in  the  International  offices,  as  his  judgment  dictates 
or  the  exigencies  of  the  case  require;  he  shall,  quarterly,  name  the 
pass- word  for  the  use  of  the  Local  Unions;  he  shall  appoint  each  year, 
on  the  first  day  the  annual  convention  meets,  a  committee  of  three 
whose  duties  shall  be  to  receive  and  pass  upon,  as  to  where  all  reso- 
lutions and  amendments  to  the  Constitution  presented  by  the  dele- 
gates belong,  and  distribute  them  to  the  proper  committees  direct 
that  have  been  appointed  to  act  upon  them. 

Sec.  3.  The  Vice-President  shall  act  as  general  organizer,  and 
shall  be  under  the  direction  of  the  President,  and  shall  succeed  that 
officer  in  case  of  death,  resignation,  or  removal  from  office. 

[Sec.  4  states  the  duties  of  the  Secretary-Treasurer,  which  are  the  usual  duties 
pertaining  to  such  an  oflBce.] 

Sec.  5.  The  Executive  Board  shall  constitute  an  International 
Board  of  Conciliation  and  Arbitration;  shall  execute  the  orders  of 
the  International  Convention,  and  between  conventions  shall  have 
full  power  to  direct  the  workings  of  the  organization,  also  to  levy  and 
collect  assessments  when  necessary.  It  shall  hold  in  trust  for  the 
United  Mine  Workers  of  America  all  money  deposited  in  the  name  of 


LABOR  PROBLEMS  675 

the  Executive  Board  by  the  Secretary-Treasurer,  but  under  no  circum- 
stances shall  said  money  be  drawn  upon  except  upon  the  written  order 
of  two-thirds  of  the  members  of  the  International  Executive  Board. 

Sec.  6.  The  International  Executive  Board  shall  have  power  to 
order  a  general  strike  or  suspension  by  a  two-thirds  vote  at  any  time 
during  the  year  that  they  deem  necessary,  and  each  member  shall 
have  one  vote,  and  one  additional  vote  for  every  two  thousand  mem- 
bers in  good  standing  they  represent,  or  a  majority  fraction  thereof; 
provided,  that  all  District  Presidents,  Vice-Presidents,  and  Secretaries 
be  called  into  joint  conference  for  consideration  before  any  general 
strike  or  suspension  order  be  issued. 

Sec.  8.  The  term  of  all  elective  officers  shall  be  from  April  i  to 
March  31  of  each  year. 

ARTICLE  m 

Qualifications  and  Salary  of  Officers 

Section  i.  Any  member  in  good  standing  in  the  organization 
shall  be  eligible  to  hold  office  in  the  International  Union,  provided 
he  is  not  a  salaried  officer  of  a  Sub-District  or  District  at  the  same 
time,  and  provided  he  has  never  been  foimd  guilty  of  misappropriating 
any  funds  of  the  organization  intrusted  to  his  care,  and  has  been  a 
member  of  a  Local  Union  for  one  year  prior  to  his  election. 

Sec.  2.  The  President's  salary  shall  be  $3,000  per  annum,  and  all 
legitimate  expenses;  Vice-President,  $2,500  per  annum,  and  all 
legitimate  expenses;  Secretary-Treasurer,  $2,500  per  annum,  and  all 
legitimate  expenses;  and  the  Editor  of  the  official  organ,  viz.,  The 
United  Mine  Workers'  J^nal,  $1,500  per  annum;  Executive  Board 
members,  $4 .  00  per  day,  and  all  legitimate  expenses,  when  employed 
by  the  President  to  work  in  the  interest  of  the  United  Mine  Workers 
of  America. 

Sec.  3.  The  compensation  of  Tellers,  Auditing  and  Credential 
Committee  shall  be  $4 .00  per  day,  and  legitimate  expenses  for  all  time 
actually  employed  in  the  performance  of  their  duty. 

article  IV 

Revenues 

Section  i.  Every  Local  Union  shall  pay  direct  to  the  Interna- 
tional Secretary-Treasurer  a  per  capita  tax  of  25  cents  per  month  per 
member,  and  such  additional  assessments  as  may  be  levied  by  an 


676  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

International  Convention,  or  a  referendum  vote  of  the  members  of 
the  United  Mine  Workers,  or  by  the  International  Executive  Board, 
for  two  months  pending  a  referendum  vote,  payments  to  be  based 
upon  the  amount  of  dues  collected  in  each  month  by  the  Local  Union. 
Boys  under  16  years  of  age  shall  be  known  as  half-members  and  shall 
pay  one-half  as  much  tax  and  assessment  as  full  members. 

Sec.  2.  The  Local  Secretary  shall  fill  out  and  forward  to  the  Inter- 
national and  District  Secretary-Treasurer,  on  or  before  the  25th  of 
each  month,  a  report  of  all  members  in  good  standing  in  the  Local 
Union  on  the  first  day  of  that  month,  together  with  all  taxes  and 
assessments  due  to  the  International  and  District  ofl&ces  from  the  same. 

Sec.  6.  No  Local  Union  shall  be  exonerated  from  the  payment 
of  per  capita  tax  or  assessments,  unless  their  members  have  been  idle 
for  one  month  or  more. 

Sec.  8.  In  all  cases  where  Local  Unions  desire  to  be  exonerated 
from  the  payment  of  tax  and  assessments,  a  request  must  be  signed 
by  the  President,  Secretary,  and  Mine  Committee.  In  such  cases 
the  President,  Secretary,  and  Committee  must  attach  their  individual 
signatures;  but  no  Local  Union  shall  be  exonerated  from  such  pay- 
ment until  their  request  has  been  approved  by  the  District  and  Inter- 
national Secretary,  and  the  request  must  be  made  each  month  in 
place  of  the  regular  monthly  financial  report  as  long  as  the  members 
remain  idle. 

Sec.  9.  The  local  monthly  dues  to  be  paid  by  each  member  shall 
not  be  less  than  50  cents  per  month,  together  with  such  assessments 
as  may  be  levied  by  the  different  branches  of  the  U.M.W.  of  A. 

Sec.  10.  The  initiation  fee  shall  be  $io.oo  for  practical  miners 
and  for  non-practical  men  it  shall  be  lefW:o  the  discretion  of  the 
district  where  applications  for  membership  are  made.  Sons  of  mem- 
bers between  fourteen  and  sixteen  years  of  age  shall  pay  an  initiation 
fee  of  $2 .  50. 

Sec.  II.  The  funds  of  the  organization  shall  be  used  for  the  pur- 
pose of  assisting  those  who  are  in  need  from  idleness  or  distress,  when 
the  payment  of  the  same  has  been  approved  by  the  International 
Executive  Board. 

article  v 

Conventions  and  Representation 

Section  i.  The  International  Convention  shall  be  held  annually 
on  the  third  Tuesday  in  January,  at  such  place  as  may  be  determined 
upon  by  the  preceding  convention.     Special  conventions  shall  be 


LABOR  PROBLEMS  677 

called  by  the  President,  when  so  instructed  by  the  Executive  Board, 
or  at  the  request  of  five  Districts. 

Sec.  2.  Representatives  to  the  International  Convention  shall  be 
elected  directly  from  Local  Unions  and  shall  have  one  vote  for  one 
hundred  members  or  less,  and  an  additional  vote  for  each  one  hundred 
members  or  majority  fraction  thereof,  but  no  representative  shall 
have,  or  be  credited  by  the  Credential  Committee  with,  more  than 
five  votes,  nor  shall  said  Credential  Committee  transfer  votes  to  any 
delegate  not  duly  authorized  by  the  Local  Union. 

Sec.  3.  No  Local  Union  shall  be  entitled  to  representation  in  the 
International  Convention  that  is  in  arrears  for  dues  or  assessments 
for  two  months  preceding  the  one  in  which  the  International  Con- 
vention is  held  and  which  has  not  in  every  particular  complied  with 
the  Constitution  of  the  District  in  which  said  Local  Union  may  be 
located,  or  which  has  less  than  ten  members 

[Sees.  4,  s,  6  cover  further  details  concerning  representation  of  locals  in  the 
convention.] 

Sec.  7.  Any  member  of  the  United  Mine  Workers  of  America 
accepting  a  position  other  than  that  of  a  miner  or  mine  worker  shall 
not  be  eligible  to  act  as  representative  to  any  Sub-District,  District, 
or  International  Convention,  or  represent  the  United  Mine  Workers 
in  a  central  body  or  State  Federation  of  Labor  Convention 

Sec.  9.  Delegates  to  the  International  Convention  shall  be  paid 
railroad  fare  to  and  from  the  convention  on  [a  stated]  basis 

Sec.  II.  Local  Unions,  having  been  organized  one  year  prior  to  the 
annual  convention  and  having  100  members  or  more  in  good  standing, 
shall  send  a  representative  to  the  annual  convention  of  the  United 
Mine  Workers  of  America,  or  pay  to  the  International  Secretary- 
Treasurer  a  fine  of  $25.00  for  each  100  members  in  good  standing  in 
the  Local  Union,  unless  exonerated  by  the  International  Executive 
Board.  This  section  is  not  to  apply  to  Local  Unions  whose  members 
are  on  strike  or  whose  members  are  idle  for  one  month  or  more  prior 
to  the  convention,  on  account  of  a  suspension  or  closing  down  of  the 
mines,  nor  does  this  section  prevent  Local  Unions  of  less  than  100 
members  holding  meetings  jointly  and  jointly  sending  a  delegate  to 
represent  such  Locals  in  the  International  Convention. 

ARTICLE   VI 

Nominations  and  Elections 
Section  i.  The  President,  Vice-President,  Secretary-Treasurer, 
Auditors,  Tellers,  and  Delegates  to  the  American  Federation  of 


678  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Labor  shall  be  elected  by  a  majority  of  the  popular  vote  of  the  mem- 
bers in  good  standing  in  the  International,  District, and  Local  organiza- 
tions. 

[The  procedure  of  elections  is  covered  in  detail  in  sections  2-9.  It  involves 
nomination  and  election  by  the  locals,  which  use  official  blanks  supplied  by  the 
International  Secretary-Treasurer.  Election  is  on  the  basis  of  a  majority  of  the 
total  vote  cast.) 

ARTICLE  Vn 

Cards 

Section  i.  Local  Unions  shall  provide  each  member  with  a  Due 
Card,  upon  which  the  dues  and  assessments  paid  by  the  member 
shall  be  entered,  which  shall  be  his  receipt  for  the  same. 

Sec.  2.  Due  Cards  shall  not  admit  any  person  to  membership 
from  one  Local  to  another,  and  to  protect  the  membership  of  indi- 
viduals who  are  unable  to  pay  their  dues  because  of  no  Local  existing 
where  they  reside,  the  International,  District,  and  Sub-District 
Secretaries  shall,  upon  the  payment  of  dues  and  assessments  by  said 
member,  issue  the  usual  cards  for  the  same;  provided  that  this  shall 
not  apply  to  a  member  living  in  a  locality  where  a  Local  Union  is  in 
existence. 

Sec.  3.  No  person  a  member  of  the  organization,  who  holds  a  Due 
or  Transfer  Card  showing  him  to  be  a  member  in  good  standing,  shall 
be  debarred  or  hindered  from  obtaining  work  on  account  of  race, 
color,  creed,  or  nationality,  and  any  person  who  shall  be  found  guilty 
of  discriminating  against  a  fellow  member  on  account  of  his  race, 
color,  creed,  or  nationality  shall  be  fined  not  less  than  $5 . 00  nor  more 
than  $25.00,  and  any  Local  that  may  be  found  guilty  of  such  dis- 
crimination for  the  same  reasons,  shall  be  fined  not  less  than  $10.00 
nor  more  than  $50.00. 

Sec.  4.  Any  member  desiring  to  leave  the  mine  where  his  Local 
in  located  and  work  elsewhere  shall  immediately  make  application 
to  the  Secretary  of  the  Local  for  a  Transfer  Card 

Sec.  6.  No  card  shall  be  issued  to  any  member  when  the  Local 
is  three  or  more  months  in  arrears  to  the  International,  District,  or 
Sub-District  for  dues  or  assessments.  Officers  of  any  Local  Union 
issuing  cards  in  violation  of  any  Section  of  Art.  VII  shall  be  fined 
$10.00  for  each  card  issued,  the  fine  to  be  collected  in  the  same  man- 
ner as  dues  and  assessments. 

Sec.  II.  The  International  Secretary-Treasurer  shall  prepare  and 
send  out  monthly  a  statement  of  all  Locals  three  months  or  more 
in  arrears  for  dues  and  assessments,  and  no  Local  Wnion  shall  refuse 


LABOR  PROBLEMS  679 

to  accept  a  Transfer  Card  from  any  Local  unless  it  appears  on  said 
list  as  being  in  bad  standing.  Local  Unions  on  strike  shall  be  exempt 
from  the  provisions  of  this  section. 

Sec.  15.  Any  member  going  to  work  in  a  non-union  or  unfair  mine 
shall  forfeit  his  membership  and  all  rights  and  privileges  guaranteed 
by  such  membership,  unless  such  work  was  done  under  a  dispensation 
granted  by  the  president  of  the  District  where  he  has  secured  employ- 
ment. 

Sec.  16.  Any  member  holding  a  Transfer  Card  shall  not  be  entitled 
to  strike  benefits  (where  such  are  paid)  from  the  Local  Union  issuing 
the  card,  until  said  card  has  been  redeposited  in  the  Local  Union 
issuing  it  and  then  only  from  the  date  the  card  was  deposited.  The 
acceptance  of  such  card  shall  be  contingent  on  the  rules  governing  the 
acceptances  of  cards  in  the  Districts  where  such  card  is  deposited. 

ARTICLE  vni 
Supplies 

Section  i.  The  price  of  a  charter  and  supplies  shall  be  $15,  and 
shall  consist  of  one  charter,  one  press  seal,  one  ledger,  one  recorder, 
one  book  of  orders  on  the  Treasury,  one  Treasurer's  receipt  book, 
fifty  Constitutions,  fifty  Due  Cards,  one  book  of  Transfer  Cards, 
four  manuals,  one  gavel,  one  copy  of  the  proceedings  of  the  last  annual 
convention,  and  such  documents  as  the  International  Secretary- 
Treasurer  may,  from  time  to  time,  desire  to  send  out. 

Sec.  2.  Due  Cards,  Transfer  Cards,  and  other  supplies  shall  be 
furnished  by  the  International  Union  to  the  Local  Unions  at  such 
rates  as  the  International  Executive  Board  may  determine. 

ARTICLE   IX 

Organizers 

Section  i.  Commissions  as  Organizer  shall  be  signed  by  the 
President  and  attested  by  the  Secretary-Treasurer. 

Sec.  2.  Organizers  not  under  salary  from  the  International  Union 
may  retain  $7  from  the  charter  fees  of  new  Locals  organized  by  them, 
'to  pay  them  for  their  time,  and  shall  send  the  other  $8  to  the  Inter- 
national office  with  their  report. 

article  X 

Strikes 

Section  i.  When  trouble  of  a  local  character  arises  between 
members  of  a  Local  Union  and  their  employers,  the  officers  of  said 
Local  shall  endeavor  to  effect  an  amicable  adjustment,  and  failing 


68o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in  this  they  shall  immediately  notify  the  officers  of  the  District  to 
which  the  affected  Locals  are  attached,  and  said  District  officers  shall 
immediately  investigate  the  cause  of  complaint;  and  failing  to  effect 
a  peaceable  settlement  on  a  basis  that  would  be  fair  and  just  to 
aggrieved  members,  finding  that  a  strike  would  best  serve  the  interests 
of  the  locality  affected,  they  may  order  the  inauguration  of  a  strike, 
but  no  local  strike  shall  be  legalized  or  supported  by  a  District  unless 
its  inauguration  was  approved  by  the  officers  of  the  District  or  by 
the  International  Executive  Board,  upon  an  appeal  taken  by  the 
aggrieved  members  from  the  decision  of  the  District  officers;  any 
Local  Union  striking  in  violation  of  the  above  provisions  shall  not  be 
sustained  or  recognized  by  the  International  officers. 

Sec.  2.  Before  final  action  is  taken  by  any  District  upon  questions 
that  directly  or  indirectly  affect  the  interests  of  the  mine  workers 
of  another  District,  or  that  require  a  strike  to  determine,  the  President 
and  Secretary  of  the  aggrieved  District  shall  jointly  prepare,  sign,  and 
forward  to  the  International  President  a  written  statement  setting 
forth  the  grievance  complained  of,  the  action  contemplated  by  the 
District,  together  with  the  reasons  therefor,  and  the  International 
President  shall,  within  five  days  after  the  receipt  of  such  statement, 
either  approve  or  disapprove  of  the  action  contemplated  by  the 
aggrieved  District,  and  such  approval  or  disapproval  together  with 
the  reasons  therefor,  shall  be  made  in  writing,  and  a  copy  forwarded 
to  the  Secretary  of  the  complaining  District.  Should  the  action  con- 
templated by  the  aggrieved  District  receive  the  approval  of  the 
International  President,  the  District  shall  be  free  to  act,  but  should  the 
International  President  disapprove  the  action  contemplated,  the  Dis- 
trict may  appeal  to  the  International  Executive  Board,  which  shall  be 
convened  to  consider  such  appeal  within  five  days  after  its  receipt  by 
the  International  Secretary.  Until  the  International  President  has 
approved  or  the  International  Executive  Board  has  sustained  the 
appeal,  no  District  shall  be  free  to  enter  upon  a  strike  unless  it  shall 
have  been  ordered  by  an  International  Convention. 

Sec.  3.  When  any  member  of  the  United  Mine  Workers  is  sus- 
pended or  discharged,  it  shall  be  the  duty  of  the  Mine  Committee 
to  immediately  investigate  the  case,  and  if  the  member  discharged 
is  not  guilty  of  an  offense  justifying  the  same,  the  grievance  shall 
immediately  be  reported  to  the  Sub-District  President  in  writing, 
under  the  seal  of  the  Local,  and  if,  upon  investigation,  the  rtport 
of  the  Local  Committee  is  found  correct,  the  Sub-District  and  District 


LABOR  PROBLEMS  _  68i 

Presidents  shall  immediately  insist  upon  the  reinstatement  of  the 
suspended  or  discharged  member. 

Sec.  4.  The  International  oflficers  shall,  at  any  time  they  deem  it 
to  the  best  interests  of  mine  workers  in  a  District  that  is  idle,  for  just 
and  sufficient  reasons,  order  a  suspension  in  any  other  District  or 
Districts  that  would  in  any  way  impede  the  settlement  of  the  District 
affected;  provided,  that  such  action  would  conserve  to  the  best 
interests  of  the  United  Mine  Workers  of  America. 

ARTICLE   XI 

Miscellaneous 

Sec.  6.  No  Local  Union  shall  divide  the  funds  of  the  Union  at  any 
time  among  its  members,  and  should  any  Local  Union  disband  or 
cease  to  work  for  any  cause,  all  moneys,  supplies,  and  other  properties 
belonging  to  the  Local  Union  shall  be  turned  over  to  the  International 
organization.  The  above  provision  shall  not  be  construed  to  prevent 
the  use  of  the  funds  for  legitimate  purposes. 

Any  Local,  Sub-District,  or  District  Union  using  the  funds  in- 
trusted to  its  care  for  other  than  legitimate  purposes  shall  be  fined 
double  the  amount  so  used.  Such  fines  shall  be  paid  into  the  Inter- 
national Treasury,  the  Sub-Districts  to  collect  fines  from  the  Locals, 
the  Districts  from  the  Sub-Districts,  and  the  International  from  the 
Districts. 

Any  Local,  Sub-District,  or  District  officer  misappropriating  funds 
intrusted  to  his  care  shall  not  be  eligible  to  again  hold  office. 

Sec.  7.  Any  National,  District,  or  Sub-District  officer  accepting 
a  salaried  political  office,  other  than  that  of  a  state  legislator,  member 
of  Congress,  member  of  Local  School  Boards,  city,  borough,  or  town 
council  or  local  poor  boards,  shall  resign  his  office  with  the  United 
Mine  Workers  immediately  upon  his  acceptance  of  the  same. 

Sec.  8.  This  Constitution  may  be  amended  by  a  majority  of  all 
votes  cast  at  the  annual  convention. 

Sec.  9.  All  Local  Unions  shall  set  aside  one  meeting  each  month 
at  which  the  agreement  and  constitution  governing  same  shall  be 
read  and  discussed. 

article  XII 

Districts 

Section  i.  Districts  shall  be  formed  with  such  number  and  terri- 
tory as  may  be  assisrned  them  by  the  International  officers,  and  shall 


682  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

be  subjected  to  the  jurisdiction,  laws,  rules,  and  usages  of  the  Interna- 
tional Union. 

Sec.  2.  Districts  may  adopt  such  laws  for  their  government  as 
they  may  deem  necessary,  provided  they  do  not  conflict  with  the 
International  Union. 

ARTICLE  xin 
Sub-Districts 

Section  i.  Sub-Districts  may  be  formed  with  such  number  and 
territory  as  may  be  assigned  them  by  the  Districts  to  which  they  are 
attached,  and  shall  be  subject  to  the  jurisdiction, laws, rules, and  usages 
of  the  International  and  District  Unions. 

Sec.  2.  Sub-Districts  may  adopt  such  laws  for  their  government 
as  they  may  deem  necessary,  provided  they  do  not  conflict  with  Inter- 
national and  District  Constitutions  or  agreements  entered  into. 

ARTICLE  xrv 
Locals 

Section  i.  Local  Unions  shall  be  composed  of  miners,  mine 
laborers,  and  other  workmen,  skilled  and  unskilled,  working  in  and 
about  the  mines,  except  mine  manager,  top  boss,  and  persons  engaged 
in  the  sale  of  intoxicating  liquors,  and  shall  be  given  such  numbers  as 
the  International  Secretary-Treasurer  may  assign  them. 

Sec.  2.  All  Locals  shall  be  under  the  jurisdiction  of  the  Inter- 
national, District,  and  Sub-District  Unions,  and  may  make  such  laws 
for  their  government  as  they  deem  necessary,  provided  they  do  not 
conflict  with  the  International,  District,  and  Sub-District  Constitu- 
tions or  agreements  entered  into.  Any  Local  Union  or  members 
thereof  violating  this  section  shall  be  subject  to  a  fine  of  not  less  than 
$5.00. 

Sec.  3.  All  Local  Treasurers  and  such  Secretaries  as  handle  the 
finances  of  the  organization  shall  furnish  sufficient  security  for  the 
faithful  performance  of  their  duties,  the  amount  of  said  security  to 
be  determined  by  the  Local  Union. 

Sec.  4.  All  local  officers  and  committees  shall  be  elected  the  last 
meeting  of  June  of  each  year,  by  a  majority  vote  of  the  members 
present,  and  shall  serve  one  year,  or  until  their  successors  are  elected 
and  qualified. 

Sec.  5.  All  Checkweighmen  employed  by  members  of  the  United 
Mine  Workers  shall  be  members  of  the  United  Mine  Workers  six 


LABOR  PROBLEMS  683 

months  prior  to  their  election,  except  newly  organized  locals,  and 
voted  for  and  elected  by  those  who  pay  to  maintain  them.  Notice 
of  election  for  Checkweighman  shall  be  posted  in  some  conspicuous 
place  at  the  mines  where  Checkweighman  is  to  be  employed  at  least 
three  days  before  the  time  set  for  such  election.  It  shall  be  the  duty 
of  such  Checkweighman  to  keep  a  record  of  all  men  employed  in  and 
aroimd  the  mine.  Under  no  consideration  shall  a  Checkweighman 
be  considered  an  officer  of  the  Local  Union.  The  term  for  which  a 
Checkweighman  shall  serve  shall  be  left  to  the  discretion  of  those  who 
employ  him.  The  above  will  not  prevent  any  local  officer  from  acting 
as  Checkweighman. 

ARTICLE   XV 

Section  1.  The  United  Mine  Workers'  Journal,  official  organ  oJ 
the  organization,  shall  be  issued  on  Thursday  of  each  week  from  head- 
quarters. It  shall  be  a  medium  for  circulating  the  news  of  interest 
to  the  craft;  shall  publish  from  time  to  time  the  important  transac- 
tions of  the  organization,  general  mining  and  trade  news,  together 
with  copies  of  official  circulars  and  financial  reports,  and  other  matters 
of  general  interest.  It  shall  be  neutral  in  politics,  non-sectarian  in 
religion,  dignified  in  tone,  and  a  consistent  advocate  of  the  principles 
of  modem  trades  organizations. 

Sec.  3.  The  business  management  of  the  Journal  shall  be  under 
the  supervision  of  the  International  Secretary 

Sec.  4.  All  Local  Unions  shall  subscribe  for  one  copy  of  the 
Journal,  paying  for  it  in  advance,  and  Secretaries  are  hereby  instructed 
to  examine  every  issue  and  read  all  official  circulars  to  the  members 
that  are  published  therein. 

197.    JOINT  INTERSTATE  AGREEMENT  OF  OPERATORS 

AND  MINERS' 

It  is  hereby  agreed  between  the  representatives  of  the  South- 
western Interstate  Coal  Operators'  Association  and  the  representatives 
of  Districts  14,  21,  and  25  of  the  United  Mine  Workers  of  America, 
that  the  existing  interstate,  district,  and  Texas  agreements  be  con- 
tinued without  any  change  or  addition  whatever,  except  as  follows: 

Day  wage,  yardage,  dead  and  deficient  work  to  be  reduced 
throughout  5.55  per  cent,  except  the  day- wage  scale  in  Texas  mines, 
which  shall  be  reduced  one-half  the  above  amount. 

'  Text  of  the  official  agreement. 


684  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Interstate  and  district  scales  to  be  signed  simultaneously  at  Pitts- 
burg and  to  expire  March  31,  1906. 

INSIDE   DAY-WAGE   SCALE 

Track  layers $2.42 

Track  layers'  helpers 2.23 

Trappers i .  07 

Bottom  cagers 2.42 

Drivers 2.42 

Trip  riders 2.42 

Pushers 2.42 

Water  haulers  and  machine  haulers 2.42 

Timbermen,  where  such  are  employed 2 .42 

Pipemen  for  compressed  air  plants 2 .36 

All  other  inside  day  labor 2.23 

Spragging,  coupling,  and  greasing,  when  done  by 

boys 1.65 

Shaft  sinkers 2 .  64 

Shot  firers  under  normal  conditions 2 .  83 

OUTSIDE   DAY-WAGE   SCALE 

First  blacksmiths $2 .  83 

Second  blacksmiths 2 .  60 

Blacksmiths'  helpers 2.23 

Carpenters 2 .  30 

(Provided  that  in  no  case  will  there  be  any  reduction  from  the  rate 
of  wages  now  paid  to  carpenters  of  more  than  5 .  55  per  cent.) 

All  other  outside^ day  labor  not  enumerated. ...  $1 .91 

Provided  that  any  class  of  outside  day  labor  now  receiving  $2 .  02^ 
or  more  per  day  shall  be  reduced  5.55  per  cent.  This  provision  only 
applies  to  outside  day  labor  not  otherwise  enumerated. 

SCALE   FOR   ENGINEERS 

Engineers,  first  class,  500  tons  and  over,  per 

month $74 .  62 

Second  class,  300  to  500  tons,  per  month 68 .  95 

Third  class,  300  tons  or  less,  per  month 61 .  40 

Tail  rope  and  slope  engineers  shall  be  reduced  5.55  per  cent 
below  present  wages. 

The  minimum  rate  for  tail  rope  and  slope  engineers  shall  be  $2 .  25 
per  day,  or  $58. 56  per  month;  provided,  further,  that  the  maximum 
rate  for  tail  rope  and  slope  engineers  shall  be  $2 .  55  per  day,  or  $66 . 1 2 
per  month.    Twenty-six  days  to  constitute  a  month's  work  and  nine 


LABOR  PROBLEMS  63$ 

hours  to  constitute  a  day's  work.  All  overtime  in  excess  of  nine 
hours  to  be  paid  for  at  a  proportionate  rate  per  hour. 

The  tonnage  shall  be  determined  by  the  average  for  the  month  of 
November,  1902,  and  based  upon  mine-run  coal;  but  in  no  case  shall 
any  reduction  from  the  present  wages  be  made. 

This  scale  of  wages  applies  only  to  mines  in  operation  at  least  one 
year,  and  in  all  new  mines  the  wages  of  the  engineers  shall  be  advanced 
with  the  increased  tonnage  until  the  maximum  rate  is  reached;  pro- 
vided, that  in  no  case  shall  engineers  employed  at  new  mines  receive 
less  than  $2 .  25  per  day;  also  that  in  no  case  shall  engineers,  firemen, 
or  pumpers  be  interfered  with  or  asked  to  cease  work  by  any  local 
committee  or  local  union  ofl5cial  during  the  life  of  this  contract. 

The  mining  prices  inside  and  outside  day- wage  scale  (except  engi- 
neers) provided  for  in  this  contract  is  based  upon  an  eight-hour 
workday. 

RULES  AND   REGULATIONS 

Eight-Hour  Day 

All  classes  of  day  labor  are  to  work  full  eight  hours,  and  the  going 
to  and  coming  from  the  respective  working  places  is  to  be  done  on  the 
day  hand's  own  time.  All  company  men  shall  perform  whatever  day 
labor  the  foreman  may  direct.  An  eight-hour  day  means  eight 
hours'  work  in  the  mines  at  the  usual  working  places,  exclusive  of 
noon  time — which  shall  be  one-half  hour — for  all  classes  of  inside  day 
labor.  This  shall  be  exclusive  of  the  time  required  in  reaching  such 
working  places  in  the  morning  and  departing  from  the  same  at 
night. 

Drivers  shall  take  their  mules  to  and  from  the  stables,  and  the 
time  required  in  so  doing  shall  not  include  any  part  of  the  day's 
labor;  their  time  beginning  when  they  reach  the  change  at  which 
they  receive  empty  cars — that  is,  the  parting  drivers  at  the  shaft 
bottom  and  the  inside  drivers  at  the  parting — and  ending  at  the  same 
places;  but  in  no  case  shall  a  driver's  time  be  docked  while  he  is 
waiting  for  such  cars  at  the  points  named.  The  inside  drivers,  at 
their  option,  may  either  walk  to  and  from  their  parting,  or  take 
with  them,  without  compensation,  either  loaded  or  empty  cars  to 
enable  them  to  ride.  This  provision,  however,  shall  not  prevent 
the  inside  drivers  from  bringing  to  and  taking  from  the  bottom 
regular  trips,  if  so  directed  by  the  operator,  provided  such  work  is 
done  within  the  eight  hours. 


686  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

When  the  stables  are  located  outside  the  mine  the  companies  agree 
to  deliver  the  mules  at  the  bottom  of  the  shaft  in  the  morning  and 
relieve  the  drivers  of  the  mules  at  the  bottom  of  the  shaft  at  night. 

When  the  men  go  into  the  mine  in  the  morning  they  shall  be 
entitled  to  two  hours'  pay  whether  or  not  the  mine  works  full  two 
hours;  but  after  the  first  two  hours  the  men  shall  be  paid  for  every 
hour  thereafter,  by  the  hour,  for  each  hour's  work  or  fractional  part 
thereof.  If  for  any  reason  the  regular  work  cannot  be  furnished  the 
inside  day  laborers  for  a  portion  of  the  first  two  hours,  the  operators 
shall  furnish  other  than  the  regular  labor  for  the  unexpired  time. 

Penalties  for  Loading  Impurities 

In  order  to  insure  the  production  of  clean,  marketable  coal,  it  is 
herein  provided  that  if  any  miner  shall  load  with  his  coal  sulphur, 
bone,  slate,  blackjack,  or  other  impurities,  he  shall,  for  the  first  offense, 
be  notified  by  the  mine  foreman;  for  the  second  offense  he  may  be 
suspended  for  one  day;  for  the  third  and  each  subsequent  offense 
occurring  in  any  one  month  he  may  be  suspended  for  three  days;  pro- 
vided, that  if  in  any  case  it  is  shown  that  a  miner  maliciously  or 
knowingly  loads  impurities,  he  shall  be  subject  to  discharge.  It  is 
further  agreed  that  if  any  miner  has  been  suspended  and  claims  that 
an  injustice  has  been  done  him,  the  matter  shall  be  taken  up  for  in- 
vestigation and  adjustment  in  the  manner  provided  in  section  three 
of  this  agreement. 

Duties  of  Pit  Committee 

a)  The  duties  of  the  pit  committee  shall  be  confined  to  the 
adjustment  of  disputes  between  the  pit  boss  and  any  member  of  the 
U.M.W.  of  A.  working  in  and  around  the  mines,  arising  out  of  this 
agreement  or  any  district  or  sub-district  agreement  made  in  con- 
nection therewith,  when  the  pit  boss  and  said  miner  or  mine 
laborer  have  failed  to  agree. 

b)  In  case  of  any  local  trouble  arising  in  any  mine  through  such 
failure  to  agree  between  the  pit  boss  and  any  miner  or  mine  laborer, 
the  pit  committee  and  the  pit  boss  are  empowered  to  adjust  it,  and  in 
the  case  of  their  disagreement  it  shall  be  referred  to  the  superintendent 
of  the  company  and  the  district  president  of  the  U.M.W.  of  A.,  or 
such  person  as  he  may  designate  to  represent  him;  and  should  they 
fail  to  agree  it  shall  be  referred  to  the  commissioner  of  the  South- 
western Interstate  Coal  Operators'  Association  and  the  district  presi- 
dent of  the  U.M.W.  of  A.  for  adjustment;  and  in  all  cases  the  mines, 


LABOR  PROBLEMS  687 

miners,  mine  laborers,  and  parties  involved  must  continue  at  work, 
pending  an  investigation  and  adjustment,  until  a  final  decision  is 
reached  in  the  manner  above  set  forth. 

c)  If  any  day  men  refuse  to  continue  at  work  because  of  a  grievance 
which  has  or  has  not  been  taken  up  for  adjustment  in  the  manner  pro- 
vided herein,  and  such  action  shall  seem  likely  to  impede  the  operation 
of  the  mine,  the  pit  committee  shall  immediately  furnish  a  man  or 
men  to  take  such  vacant  place  or  places  at  the  scale  rate,  in  order  that 
the  mine  may  continue  at  work;  and  it  shall  be  the  duty  of  any  mem- 
ber or  members  of  the  United  Mine  Workers  who  may  be  called  upon 
by  the  pit  boss  or  pit  committee  to  immediately  take  the  place  or 
places  assigned  to  him  or  them  in  pursuance  hereof. 

d)  The  pit  committee,  in  the  discharge  of  its  duties,  shall  under  no 
circumstances  go  around  the  mine  for  any  cause  whatever,  unless 
called  upon  by  the  pit  boss  or  by  a  miner  or  a  company  man  who  may 
have  a  grievance  that  he  cannot  settle  with  the  boss.  Any  pit  com- 
mitteeman who  shall  attempt  to  execute  any  local  rule  or  proceeding 
in  conflict  with  any  provision  of  this  contract,  or  any  other  made  in 
pursuance  hereof,  shall  be  forthwith  deposed  as  committeeman.  The 
foregoing  shall  not  be  construed  to  prohibit  the  pit  committee  from 
looking  after  the  matter  of  membership  dues  and  initiations  in  any 
proper  manner. 

e)  Members  of  the  pit  committee  employed  as  day  men  shall  not 
leave  their  places  of  duty  during  working  hours  except  by  permission 
of  the  operator,  or  in  cases  involving  the  stoppage  of  the  mine. 

/)  The  right  to  hire  and  discharge,  the  management  of  the  mine, 
and  the  direction  of  the  working  force  are  vested  exclusively  in  the 
operator,  and  the  U.M.W.  of  A.  shall  not  abridge  this  right.  It  is  not 
the  intention  of  this  provision  to  encourage  the  discharge  of  employees 
or  the  refusal  of  employment  to  applicants  because  of  personal 
prejudice  or  activity  in  matters  affecting  the  U.M.W.  of  A.  If  any 
employee  shall  be  discharged  or  suspended  by  the  company  and  it  is 
claimed  that  an  injustice  has  been  done  him,  an  investigation,  to  be 
conducted  by  the  parties  and  in  the  manner  set  forth  in  paragraphs 
a  and  h  of  this  section,  shall  be  taken  up  promptly,  and  if  it  is 
proven  that  an  injustice  has  been  done,  the  operator  shall  reinstate 
said  employee  and  pay  him  full  compensation  for  the  time  he  has  been 
suspended  and  out  of  employment;  provided,  if  no  decision  shall  be 
rendered  within  five  days  the  case  shall  be  considered  closed,  in  so  far 
as  compensation  is  concerned,  unless  said  failure  to  arrive  at  a  ded- 


688  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

sion  witliin  five  days  is  owing  to  delay  upon  the  part  of  the  operator, 
in  which  case  a  maximum  of  ten  days'  compensation  shall  be  paid. 

Local  Demands 

There  shall  be  no  demands  made  locally  by  either  operators  or  min- 
ers which  are  in  conflict  with  this  agreement  or  any  district  or  sub- 
district  agreement  made  prior  to  September  i,  1904;  and  there  shall 
be  no  provision  imposed  violating  the  same.  Any  local  member, 
official,  or  committee  shutting  down  a  mine  without  orders  from  the 
district  president  or  district  executive  board  shall  be  fined  in  the 
uanner  provided  for  in  the  national  constitution  of  the  U.M.W.  of 
A.,  and  such  additional  penalties  may  be  imposed  as  are  now  or  may 
be  provided  for  in  the  constitutions  of  the  various  district  organiza- 
tions. All  such  fines  are  to  be  collected  by  the  companies  and  paid 
into  the  district  treasury  of  the  U.M.W.  of  A.  Should  any  operator 
violate  this  agreement,  or  any  provision  hereof,  such  operator  or  com- 
pany shall  be  fined  one  hundred  dollars  ($100),  said  fine  to  be  paid 
into  the  treasury  of  the  Southwestern  Interstate  Coal  Operators' 
Association. 

Payment  of  Wages 

The  operators  agree  to  pay  twice  a  month,  the  dates  of  payment  to 
be  determined  by  the  district  joint  convention;  and  these  payments 
are  to  be  made  at  the  office  nearest  to  the  mine  wherein  or  at  which 
the  employees  are  employed;  provided,  however,  that  this  office 
shall  be  located  not  more  than  two  miles  from  such  mine. 

Check-off 

The  operators  will  recognize  the  pit  committee  in  the  discharge  of 
their  duties,  as  provided  in  this  agreement,  and  agree  to  check  ofif 
dues,  assessments,  fines,  and  initiations  from  all  miners  and  mine 
laborers  when  desired.  In  order  to  protect  the  companies,  the 
U.M.W.  of  A.  agrees,  when  the  companies  so  demand,  to  furnish  a 
collective  and  continuous  order  authorizing  the  companies  to  make 
such  deductions.  The  companies  agree  to  furnish  the  miners'  local 
representatives  a  monthly  statement  showing  separately  the  amount 
of  dues,  assessments,  fines,  and  initiations  collected.  In  case  any  fine 
is  imposed  the  propriety  of  which  is  questioned,  the  amount  of  such 
fine  shall  be  withheld  by  the  operator  until  the  case  has  been  taken 
up  for  adjustment  and  a  decision  reached. 

It  is  agreed  that  the  miners  may  employ  a  checkweighman  to  see 
that  coal  is  properly  weighed  and  a  correct  record  made  thereof, 


LABOR  PROBLEMS  689 

and  when  such  checkweighman  is  employed  the  companies  shall  fur- 
nish him  a  check  number,  and  he  shall  credit  to  his  number  such  por- 
tion of  each  miner's  coal  as  he  may  be  authorized  to  do  by  the  local 
union.  It  is  understood  that  the  above  provision  shall  not  affect  the 
arrangements  now  existing  at  any  mine  where  a  check  number  is 
issued  in  the  name  of  the  local  union,  and  dues,  assessments,  fines,  and 
initiations  collected  by  this  method. 

Measurements 

It  is  agreed  that  measurements  of  entries,  brushing,  room  turnip, 
and  deadwork  shall  be  made  semi-monthly,  and  payment  in  full 
shall  be  made  for  such  work  in  the  same  manner  as  that  in  which  other 
work  is  paid  for. 

Equal  Turn 

The  operator  shall  see  that  an  equal  turn  is  offered  each  miner  and 
that  he  be  given  a  fair  chance  to  obtain  the  same.  The  checkweigh- 
man shall  keep  a  turn  bulletin  for  the  turn  keeper's  guidance.  The 
drivers  shall  be  subject  to  whomever  the  mine  manager  shall  designate 
as  turn  keeper  in  pursuance  hereof. 

Deaths  and  Funerals 

In  the  case  of  an  instantaneous  death  by  accident  in  the  mine,  the 
miners  and  underground  employees  shall  have  the  privilege  of  discon- 
tinuing work  for  the  remainder  of  that  day;  but  work,  at  the  option 
of  the  operator,  shall  be  resumed  the  day  following  and  continue 
thereafter.  In  case  the  operator  elects  to  operate  the  mine  on  the  day 
of  the  funeral  of  the  deceased,  as  above,  or  where  death  has  resulted 
from  an  accident  in  the  mine,  individual  miners  and  underground 
employees  may,  at  their  option,  absent  themselves  from  work  for 
the  purpose  of  attending  such  funeral,  but  not  otherwise.  And 
whether  attending  such  funeral  or  not,  each  member  of  the  U.M.W. 
of  A.,  employed  at  the  mine  at  which  the  deceased  member  was 
employed,  shall  contribute  fifty  (50)  cents  and  the  operator  twenty- 
five  ($25)  dollars  for  the  benefit  of  the  family  of  the  deceased  or  his 
legal  representatives,  to  be  collected  through  the  office  of  the  company. 
In  the  event  that  the  mines  are  thrown  idle  on  account  of  the  miners' 
or  other  employees'  failure  to  report  for  work  in  the  time  intervening 
between  the  time  of  the  accident  and  the  funeral,  or  on  the  day  of 
the  funeral,  then  the  company  shall  not  be  called  upon  for  the  pay- 
ment of  the  twenty-five  ($25)  dollars  above  referred  to. 


690  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Except  in  cases  of  fatal  accidents,  as  above,  the  mine  shall  in  no 
case  be  thrown  idle  because  of  any  death  or  funeral;  but  in  the  case 
of  the  death  of  any  employee  of  the  company  or  member  of  his  family, 
any  individual  miner  may,  at  his  option,  absent  himself  from  work 
for  the  purpose  of  attending  such  funeral,  but  not  otherwise. 

Doctor 

No  deduction  shall  be  made  for  doctors,  unless  such  deduction  is 
authorized  by  the  individual  employee. 

Condition  of  the  Mine 

The  company  shall  keep  the  mine  in  as  dry  condition  as  practi- 
cable, by  keeping  the  water  off  the  road  and  out  of  the  working  places. 
When  a  miner  has  to  leave  his  working  place  on  account  of  water, 
through  the  neglect  of  the  company,  they  shall  employ  said  miner 
doing  company  work  when  practicable,  and  provided  that  said  miner 
is  competent  to  do  such  work,  or  he  shall  be  given  another  working 
place  until  such  water  is  taken  out  of  his  place. 

Provisions  for  Injured 

The  operators  shall  keep  sufficient  blankets,  oil,  bandages,  etc., 
and  provide  suitable  ambulance  or  conveyance,  readily  available  at 
each  mine  to  properly  convey  injured  persons  to  their  homes  after 
an  accident. 

Powder 

The  price  of  powder  shall  be  $2 .00  per  keg  during  the  term  of  this 
contract. 

igo6  Joint  Convention 

It  is  agreed  that  the  Southwestern  Interstate  Coal  Operators* 
Association  and  the  representatives  of  the  United  Mine  Workers  of 
America  shall  meet  in  the  city  of  IndianapoHs,  Indiana,  on  the  25th 
day  of  January,  1906,  at  10  o'clock  a.m. 


LABOR  PROBLEMS 


691 


198.    A  PIECE-WORK  WAGE-SCALE  AGREEMENT* 

CHINA 
HANDLING 


Coffee  Pots,  all  sizes $0 .  20 

Cups,  ordinary  shapes 045 

"       TuUp 05 

"       A.  D.  Coffees,  Special. . .       07 

Jugs,  Whiskey 08 

Mugs,  all  shapes 06 


Mustards $0 .04 

Sugars,  24s 08 

"       30s 08 

«       3&S 08 

"        42s 08 


u 

m 
a 
It 


u 

a 
u 
u 


Basins,  Plain,  gs $0 

Butters,  Individual,  Plain 

Butters,  Loose  Drainer 

"        Fast  Drainer 

"        Covered,  complete 

Bowls,  Oyster 

Bowls,  Punch,  9  inch 

10  inch  

1 1  inch 

1 2  inch 

13^  inch 

15    inch 

Cake  Covers,  made  for  turners. . 

"  "      to  be  sponged .... 

Compotes,  all  sizes,  foot  thrown 
Cups,  with  ball,  Turned ...  2  J  to 

Fruits,  Plain 

Ice  Creams,  Plain 

Ice  Tubs,    Scinch,  Turned.... 

"  9^  inch 

"  ID    inch 

Nappies,  Plain,  3  inch 

4  inch 

5  inch 

6  inch 

7  inch 

8  inch 

9  inch 

Nappies,  Fluted,  5  inch 

Plates,  Flat,  Plain,  4    inch. . . . 

«      S    inch.... 


JIGGERING 
35 


u 
a 
u 
ts 
u 
u 


035 
SO 

55 

60 
04 
28 
28 
28 
28 
40 
40 
04 
06 

10 

04 
033 

03i 

40 

45 
50 
07 
07 
07 
10 
10 
10 
10 

13 
04 
04 


Plates,  Flat,  Plain,  5^  inch. . . 

"      6    inch... 

"      6Hnch... 

«         "         «      7    inch... 

"         "  "      7i  inch . , . 

"     8   inch... 

Plates,  Flat,  Festoon,  4    inch. 

5  inch. 
5^  inch. 

6  inch. 
6^  inch. 

7  inch. 
7^  inch. 

8  inch. 
Plates,  Deep,  Plain,  5    inch.. 

5J|"^^-- 

6  inch . . 

63  inch . . 

7  inch.. 
7^  inch .  . 

8  inch.  . 
Plates,  Deep,  Festoon,  5   inch 

5^  inch 

6  inch 
6^  inch 

7  inch 
7I  inch 

8  inch 
Plates,  Coup6  Soup,  6  inch. . 

"          "     7  inch.. 
Saucers,  Plain 


« 

u 
u 
a 
u 
u 


$0.05 

05 
c6 
07 
07 
08 
05 
OS 
06 
06 
07 

07 
08 
08 

05 
o6i 
06 
07 

07 
08 
08 
06 
07 
07 
08 
08 
09 

09 
06 
o6i 
04 


THROWING 


Brush  Vases Net  $0.09 

Coffee  Mugs Net      09 

Coffee  Pots,  Vienna,  is Net       13 

«  «    _   2s Net      13 

Compotes,  Feet,  5  inch Net       10 

"  "     6  inch Net      10 


Compotes,  Feet,  7  inch Net  $0.10 

"     8  inch Net      12 

"  "9  inch Net      12 

Creams,  Vienna,  is Net      05 

"       2s Net      06 

«       -         ....Net 


3S. 


07 


»  From  the  oflacial  booklet,  Wage  Scale  and  Agreements  between  the  United  States 
Potters'  Association  and  the  National  Brotherhood  of  Operative  Potters,  Adopted 
October  i,  1905. 

[The  passage  here  reproduced  is  only  a  small  portion  of  the  original  document. 
The  complete  text  of  the  agreement  covers  some  fifty  pages. — Editors.] 


bg2 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Custards,  small Net $0.05 

"         large Net  06 

Egg  Cups,  Double Net  06 

"          Single Net  05 

Match  Safes,  Cornick,  IS.  .  .Net  09 

"           «         2S...Net  09 

3S...Net  09 

Match  Safes,  Flat  Fooled..  .Net  18 

"           "       French  B,  is.. Net  11 

2s..Net  15 

Molasses  Cans,  Barrel Net  11 

Mustard  Barrel  and  Cover.. Net  08 

Mustards,  Vienna Net  08 


Mustards,  New  York 

Mugs,  42s 

"       36s 

"       30s 

"       74s 

0.  M.  D.  Cans 

Spittoons,  small 

large 

Sugars,  Round,  Covered,  all 

sizes 

Whiskeys,  i  quart 

"  I  pint 

ipint 


NeiSo.ii 
Net      04 


Net 
Net 
Net 
Net 
Net 
Net 


05 
06 

07 
25 

25 

30 


Net  13 

Net  20 

Net  15 

Net  II 


TURNING 


u  u 

«  u 

a  u 


o8i 
105 


Bowls,  Oyster,  Single  Thick,42s$o.o75 

«  36s 
"  30s 
"       24s 

Bowls,  St.  Dennis,  36s 06 

"  "  30s 06^ 

"  "  24s 07 

Bowls,  Tulip,  30s 085 

"       36s 07^ 

42s 07 

Cake  Covers,  knobbed 15 

Coffees,  Extra  Thick 05^ 

«       Culot 06 

"       A.  D.  Culot OS 

Coffee  Pots,  Vienna,  complete. .  20 

Compotes,  5  and  6  inch 25 

"  7  and  8  inch 30 

*  Scinch 35 

"  9  inch 40 

Compotes,  Sticking  up 18 

Creams,  No.  i 09 

"        No.  2 09 

"        No.  3 10 

Cups,  Custard 09 

Cups,  Tea,  Single  Thick 04 

"      Coffee, 

«      Tea,  Double  Thick 04^ 

"      Coffee,  "  05 

«      A.  D.,  Thin 04^ 

Cups,  Tulip,  Teas 04^ 

"  "      Coffees C5 

Egg  Cups,  Double 10 

"        Single 09 


04  J 


Ice  Tubs,  Small $0  -35 

"  Large 45 

"  Footed 60 

Jugs,  Whiskey 30 

Match  Safes,  No.  i 12 

"       No.  2 II 

"       No.  3 10 

Molasses  Cans 20 

"  "      Extra  Large.  ...  35 

Mugs,  Cable,  42s 09 

"       36s 09 

30s 10 

24s II 

Mustards,  Bodies 08-09 

"         Covers 08-09 

Oysters,  Gov '    lo^ 

"        Plain o8| 

Salads,  5  inch 12 

"        6  inch 14 

"        7  inch 16 

"        8  inch 18 

"        9  inch 20 

Spittoons,  Low 30 

High 35 

Sugars,  Hotel,  complete 17 

"  "       Covers 08^ 

Sugars,  Round,  42s,   complete.  .  16 

36s,  "      ..  17 

30s,  «      ..  18 

24s,  "       . .  19 

Covers,  36s.  .  .  .  08^ 

"       30s ...  .  09 

"       24s. .  .  .  09J 


u  u 

u  u 

II  u 

u  u 

a  u 

a  u 


LABOR  PROBLEMS  693 

199.    THE  ATTITUDE  OF  THE  TYPOGRAPHICAL  UNION 
TOWARD  MACHINERY* 

It  is  probably  not  far  wrong  to  say  that  trade  unionists  universally 
regard  the  introduction  of  new  machinery  as  a  misfortune.  With  the 
possible  exception  of  a  very  few  industries,  like  the  cotton  manu- 
facture, in  which  machine  production  has  already  been  long  and  highly 
developed,  a  new  machine  always  appears  to  the  workingman  as  a 
displacer  of  men,  a  creator  of  unemployment,  a  depresser  of  wages. 
Trade-union  leaders,  even  when  they  express  their  acceptance  of  the 
advance  of  machine  production  as  a  necessary  feature  of  social  prog- 
gress,  usually  manifest  the  feeling  that,  if  it  is  not  inevitably  at  the 
expense  of  the  workingman,  it  at  least  increases  the  difficulty  of 
maintaining  his  economic  position.  It  is  doubtful  whether  any  union 
which  felt  strong  enough  to  keep  machinery  out  of  its  trade  ever 
submitted  without  a  contest  to  the  introduction  of  it.  The  experience 
of  long  years  has  taught  the  unions,  however,  that  in  general  the  intro- 
duction of  machinery  cannot  be  prevented,  and  direct  attempts  to 
keep  it  out  are  now  comparatively  few. 

The  unions  that  have  fared  best  in  their  dealings  with  machinery 
are  those  that  have  frankly  and  promptly  recognized  the  inevitable- 
ness  of  it,  and  have  devoted  their  energies,  not  to  the  hopeless  task  of 
preventing  the  use  of  it,  but  to  regulating  the  manner  of  use.  Prob- 
ably no  union  in  this  country  furnishes  a  better  example  of  a  wise 
policy  toward  machinery  than  the  International  Typographical 
Union..  When  the  tjrpesetting  machines  began  to  be  introduced, 
the  union  promptly  accepted  them  as  inevitable,  and  only  insisted 
that  they  be  operated  exclusively  by  members  of  the  organization,  and 
on  union  terms.  If  the  attempt  had  been  made  to  keep  the  machines 
out  of  printing  offices,  the  fate  of  the  hand  compositors  might  possibly 
have  been  comparable  with  that  of  the  hand  weavers,  who  tried  a 
hundred  years  ago  to  compete  with  the  power  loom.  The  union 
would  have  been  driven  out  of  all  important  printing  offices,  the 
machines  would  have  been  run  by  nonunion  hands;  wages,  both  of 
machine  operators  and  of  hand  compositors,  would  have  been  cut, 
and  hours  of  labor  would  have  been  lengthened.  By  the  policy  which 
the  union  adopted  the  number  of  its  members  who  were  thrown  out 

'  From  the  Report  of  the  Industrial  Commission  (1901),  XVII,  Ix-lxi. 
[For  another  discussion  of  the  effects  of  machinery  in  displacing  skilled  labor 
see  Selection  39:  "Immigration  and  the  Use  of  Machinery." — Editors.] 


694  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  employment  by  machines  was  greatly  diminished,  wages  were 
maintained  and  gradually  raised,  hours  were  gradually  shortened. 
The  union  has  been  able  to  secure  for  its  members  a  share  of  the 
benefits  of  the  machine,  instead  of  seeing  all  its  benefits,  together  with 
a  portion  of  the  advantages  which  they  themselves  had  previously 
enjoyed,  divided  between  the  employing  printers  and  the  community 
at  large.  The  wage  scales  for  machine  operators  are  uniformly 
maintained  at  least  as  high  as  those  of  hand  compositors,  and  in  many 
cases  higher;  and  in  most  places  the  hours  of  machine  operators  are 
shorter. 

200.    THE  DAYTON  EMPLOYERS'  ASSOCIATION' 

The  Dayton  Employers'  Association  was  organized  in  June,  1900, 
with  thirty-eight  charter  members,  and  was  probably  the  first  asso- 
ciation formed  for  the  definite  purposes  set  forth  in  its  constitution, 
as  follows: 

First — To  protect  its  members  in  their  right  to  manage  their 
respective  businesses,  in  such  lawful  manner  as  they  may  deem  proper. 

Second — The  adoption  of  a  uniform  legitimate  system  whereby 
members  may  ascertain  who  is,  or  who  is  not,  worthy  of  their  employ- 
ment. 

Third — ^The  investigation  and  adjustment,  by  proper  oflScer  or 
committees  of  the  association,  of  any  question  arising  between 
members  and  the  employees,  when  such  question  shall  be  submitted 
to  the  association  for  adjustment. 

Fourth — To  endeavor  to  make  it  possible  for  any  persons  to 
obtain  employment  without  being  obliged  to  join  a  labor  organiza- 
tion, and  to  encourage  all  such  persons  in  their  efforts  to  resist  the 
compulsory  methods  of  organized  labor. 

Fifth — To  protect  its  members  in  such  manner  as  may  be 
deemed  expedient  and  proper,  against  legislative,  municipal,  and  other 
political  encroachments. 

Certainly  it  was  the  first  association  organized  on  the  basis  of 
including  in  its  membership  manufacturers,  building  contractors, 
merchants,  and  employers  engaged  in  every  character  and  class  of 
business  or  trades. 

'  Adapted  from  a  pamphlet,  Benefits  of  Employers^  Associations,  by  A.  C. 
Marshall,  formerly  secretary  of  The  Dayton  Employers'  Association, 


LABOR  PROBLEMS  695 

201.    THE  NATIONAL  FOUNDERS'  ASSOCIATION* 

Organized. — In  1898,  by  a  limited  number  of  foimdry  proprietors. 

Why  organized. — Because  the  foundrymen  who  became  its  charter 
members  found  themselves  at  the  mercy  of  foundry  labor  unions — 
chiefly  among  iron  molders — and  with  broadminded  foresight  con- 
cluded that  the  effect  of  organizations  of  labor  must  be  held  in  check 
by  organizations  of  employers  if  the  foundry  industry  were  to  remain 
upon  a  sound  financial  basis. 

Its  aims  and  purposes. — ^The  adoption  of  a  uniform  basis  for 
just  and  equitable  dealings  between  members  and  their  employees, 
whereby  the  interests  of  both  will  be  properly  protected. 

Character  of  membership. — Persons,  firms,  or  corporations  engaged 
as  principals  in  and  operators  of  foundries  where  castings  in  iron, 
steel,  brass,  or  other  metals  are  made. 

The  Association  has  now  been  in  existence  12  years,  during  which 
it  has  retained  upon  its  rolls  continually  a  representative  class  of 
foundry  proprietors,  who  have  been  influenced  in  the  continuation 
of  their  membership  year  after  year,  by  the  broadminded  desire  to 
accomplish  as  much  as  possible  for  the  general  good  of  the  entire 
industry  as  a  result  of  concerted  action.  Motives  of  selfish  gain 
have  not  been  influential  in  the  maintenance  of  the  Association. 

Its  early  policy. — The  foundrymen  first  comprising  the  member- 
ship of  the  N.F.A.  made  a  decided  attempt  to  meet  the  union  of 
iron  molders  and  arrange  a  system  of  agreements  based  upon  the 
theory  of  "collective  bargaining." 

Seven  years,  diuring  which  approximately  2,500  conferences  with 
iron  molders'  union  officials  were  held,  were  devoted  to  an  attempt 
to  work  out  this  policy.  Ultimately  this  was  found  impossible 
because  of  the  adherence  of  the  union  to  rules  and  regulations  which 
it  had  adopted  for  its  own  guidance  as  far  back  as  1859. 

The  failure  of  the  union  to  appreciate  the  progressiveness  of  the 
age  necessitated  the  adoption  by  the  N.F.A.  of  an  entirely  independent 
policy. 

Its  present  policy. — Was  adopted  November,  1904,  and  has  been 
maintained  successfully  ever  since. 

This  policy  declares  against  union  limitations  of  the  foimdry 
output  or  the  earning  capacity  of  the  employee;  against  the  imposition 
by  labor  unions  of  fines  and  restrictions  upon  the  workmen;  in  favor 

'  Adapted  from  a  pamphlet,  Concise  Information  Regarding  the  National 
Founders'  Association,  issued  by  the  Association,  May,  191 1. 


696  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  a  fair  day's  pay  for  a  fair  day's  work  and  the  right  of  the  employer 
to  employ  whomsoever  he  may  wish  without  regard  to  union  affilia- 
tion; that  all  workmen  shall  be  required  to  work  peacefully  and 
harmoniously  with  fellow  workmen;  against  the  limitation  of  the 
employment  of  apprentices  or  unskilled  help  and  in  favor  of  the  right 
of  the  foundryman  to  introduce  molding  machines  and  improved 
appliances  and  operate  them  with  whatever  class  of  labor  he  may 
select. 

Character  of  support  accorded  members  during  strikes. — By  procur- 
ing workmen  to  take  the  places  of  strikers;  by  having  the  members' 
castings  made  elsewhere;  by  granting  compensation  to  the  member 
on  the  basis  of  idle  floors  during  the  strike. 

Dissemination  of  literature  among  workmen. — Every  American 
labor  union  today  possesses  its  weekly  or  monthly  publication  sent 
to  the  homes  of  workmen,  preaching  the  doctrines  of  trade  unionism. 
There  are  nearly  400  of  these  publications. 

Realizing  the  demoralizing  effects  of  the  dissemination  of  this 
literature,  the  N.F.A.  began  five  years  ago  to  send  its  own  publica- 
tion into  the  homes  of  iron  molders  in  order  that  they  might  learn 
the  employers'  side  of  the  case. 

The  Review  is  now  sought  by  the  best  element  among  the  molders 
and  is  valued  far  in  excess  of  any  of  the  union  journals.  The  results 
of  this  educational  work  have  already  proved  it  of  inestimable  value, 
and  it  should  be  extended  to  all  branches  of  the  trade.' 

In  this  work  the  N.F.A.  is  the  pioneer  of  all  employers'  associa- 
tions. 

National  legislation  at  Washington. — The  efforts  of  union  labor 
to  secure  pernicious  class  legislation  at  Washington  are  fraught  with 
danger  to  the  manufacturer.  The  National  Founders'  Association 
has  been  most  active  in  working  for  the  protection  of  the  interests 
of  the  foundry  industry  in  preventing  the  passage  of  legislation  of 
this  character. 

Results. — The  iron  molders'  union  has  been  compelled  to  alter 
its  ratio  of  apprentices  in  union  shops. 

It  has  been  compelled  to  surrender  control  of  the  molding  machine 
in  the  jobbing  and  machinery  foundry. 

It  has  been  compelled  to  refrain  from  its  slugging  and  murderous 
tactics  in  fighting  strikes. 

It  has  been  compelled  to  abandon  its  policy  of  attempting  to 
prevent  a  union  foundry  from  making  castings  from  a  struck  shop. 


LABOR  PROBLEMS  697 

It  has  been  compelled  to  recognize  the  growing  practice  of  employ- 
ing imskilled  workmen  in  the  production  of  lower  grades  of  castings 
by  making  provision  to  admit  these  workmen  into  the  union  under 
a  special  charter. 

It  has  been  compelled  to  admit  that  there  is  little  or  nothing  to 
be  gained  by  agreements  between  foundrymen  and  this  union. 

It  has  surrendered  its  demands  for  closed  shop  written  agreements 
where  there  is  the  slightest  opposition. 

It  has  surrendered  its  position  of  independence  toward  kindred 
organizations  and  applied  to  them  for  assistance. 

It  has  surrendered  its  claim  of  lack  of  demands  upon  its  members 
for  excessive  assessments  by  increasing  its  dues  60  per  cent. 

"  It   has   surrendered   its   boastful   independence   and   claims   of 
hundreds  of  thousands  of  dollars  on  deposit. 

Its  individual  members,  in  certain  localities,  have  been  compelled 
to  pay  their  local  and  national  unions  over  $130.00  each  per  year 
for  assessments. 

Its  membership  has  been  depleted  to  such  an  extent  as  seriously 
to  reduce  its  revenue  and  exhaust  its  reserve  resources.  The  defeat 
of  this  union  in  its  1906  strike  reduced  its  membership  over  50  per 
cent. 

Instead  of  being  compelled  to  devote  their  entire  time  to  receiv- 
ing and  dealing  with  demands  from  the  molders'  union  as  heretofore, 
foundrymen  are  now  giving  their  attention  to  the  introduction  of 
improvements.  Shops  without  number  are  today  immune  from  these 
difl&culties  which  three  years  ago  were  confronting  them  daily. 

Wholesale  defeat  of  the  molders'  union,  through  the  N.F.A.,  in 
strikes  during  the  past  6  years  has  so  diminished  the  union  influence 
in  the  one  item  of  "restriction  of  output"  as  to  be  worth  millions  of 
dollars  to  the  foundry  industry. 

Some  foundry  proprietors  estimate  their  increased  output,  as  a 
result  of  the  removal  of  union  influence,  at  10  per  cent;  others  at 
25  per  cent  and  still  others  estimate  as  high  as  100  per  cent;  this 
latter  figure  is  known  to  be  correct  in  many  instances  where  molding 
machines  were  introduced. 

Cost  of  initiation  for  new  members. — Based  entirely  upon  the 
number  of  employees  engaged  in  the  foundry  as  follows: 

For  each  floor  molder,  $2.50;  for  each  bench  molder  and  core- 
maker,  $1.87!;  for  each  apprentice,  molding  machine  operator  or 
specialty  molder  not  skilled  in  the  general  trade,  $1.25. 


698  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

This  is  payable  but  once  and  then  not  until  the  new  member  is 
notified  of  his  election. 

Amount  of  regular  dues. — These  are  payable  quarterly,  based 
upon  reports  made  by  the  member.  The  rates  (based  on  the  average 
number  employed)  are  as  follows: 

For  each  floor  molder,  40  cents  per  month;  for  each  bench  molder 
and  coremaker,  30  cents  per  month;  for  each  apprentice,  molding 
machine  operator  or  specialty  molder  not  skilled  in  the  general  trade, 
20  cents  per  month. 

Foundry  laborers,  helpers,  cupola  tenders,  chippers,  etc.,  are  not. 
subject  to  assessment  under  this  schedule  of  employees. 

202.    THE  UNITED  TYPOTHETAE  OF  AMERICA' 

The  United  Typothetae  of  America  is  a  voluntary  association 
of  master  printers  organized  to  advance  the  interests  of  its  member- 
ship in  particular  and  incidentally  to  bring  about  better  conditions 
in  the  entire  printing  industry — an  industry,  by  the  way,  which  ranks 
seventh  in  importance  in  the  United  States.  When  the  Typothetae 
was  organized,  twenty-four  years  ago,  it  was  brought  into  being 
because  of  the  crystallization  of  the  belief  that  an  organization 
of  master  printers  was  a  necessity.  Theretofore  the  employers 
were  unorganized,  though  their  employees  were  acting  as  a  unit  in 
practically  all  branches  of  the  business. 

While  more  or  less  attention  has  always  been  paid  to  questions 
of  costs  and  other  matters  relating  to  efficiency  and  management, 
it  was  not  until  about  three  years  ago,  that  the  organization  as  a 
whole  saw  the  necessity  of  broadening  the  scope  of  its  work  to  an 
extent  that  would  permit  it  to  include  everything  which  in  any  way 
has  a  bearing  on  the  interests  and  welfare  of  its  membership.  With 
the  adoption  of  this  broader  policy  it  was  decided  to  drop  from  con- 
sideration, so  far  as  the  national  body  was  concerned,  the  question 
of  whether  shops  were  to  be  "open"  or  "closed,"  as  it  was  seen  that 
this  was  a  matter  which  could  best  be  handled  by  the  local  branches 
or  by  the  individual  plant. 

That  the  new  policy  was  a  move  in  the  right  direction  is  proven  by 
the  astonishing  increase  in  the  membership  of  the  United  Typothetae 

'Adapted  from  a  pamphlet,  United  Typothetae  of  America,  What  It  Is  and 
What  It  Stands  For,  issued  by  the  Association,  June,  191 1. 


LABOR  PROBLEMS  699 

of  America  since  its  adoption.  Membership  in  the  Typothetae  is 
now  seen  to  be,  indirectly,  a  source  of  actual  profit,  for  the  expense 
is  merely  nominal  and  the  benefits  great.  The  following  statement 
of  its  aims  and  objects  shows  its  broad  field  of  endeavor: 

Education  of  printers  in  matters  of  cost  of  production. 

Education  of  printers  in  the  benefits  of  organization,  keeping 
especially  in  mind  the  greater  power  of  one  than  of  several  associations. 

The  encouragement  of  more  friendly  relations  and  of  greater 
confidence  between  printers,  regardless  of  whether  they  are  located 
in  the  same  city  or  in  widely  scattered  sections. 

The  promotion  of  trade  schools  for  the  education  of  printers. 

The  installation,  under  the  supervision  of  experts,  of  scientific 
cost-finding  systems. 

The  maintenance  of  credit  bureaus. 

The  standardization  of  printing  plants. 

Suggesting  plans  for  the  rearrangement  of  workrooms,  to  the 
end  that  there  may  be  greater  economy  in  the  expenditure  of  time. 

The  establishment  of  satisfactory  trade  relations  with  paper- 
dealers,  supply  houses,  machinery-builders,  and  all  those  from  whom 
equipment  or  supplies  are  purchased. 

The  standardization  of  shop  practices. 

The  promotion  of  mutual  fire  insurance  companies. 

The  education  of  printers  in  the  principles  of  scientific  manage- 
ment. 

The  maintenance  of  a  free  employment  bureau. 

The  education  of  managers  and  men  in  matters  of  efficiency. 

Education  in  the  essentials  of  time  requirements  as  they  relate 
to  all  the  processes  entering  into  the  production  of  printing. 

Advising  the  membership  concerning  the  purchase  of  new 
machinery  or  other  equipment. 

All  other  matters  coming  up  from  time  to  time  which  in  any  way 
aflfect  the  interests  of  the  master  printer. 

The  above  is  the  platform  of  the  United  Typothetae  of  America. 
It  will  be  seen  that  almost  every  item  must  be  taken  up  nationally 
if  anything  worth  while  is  to  be  accomplished.  So  far  as  insurance 
is  concerned,  two  mutual  companies  have  already  been  formed  through 
the  influence  of  the  Typothetae,  and  the  organization  is  supporting 
the  School  of  Printing  at  Indianapolis  both  morally  and  financially. 


700  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

203.     IKDUSTRIAL   UNIONISM  AND  THE  INDUSTRIAL 
WORKERS  OF  THE  WORLD' 

The  principle  upon  which  industrial  unionism  takes  its  stand  is 
the  recognition  of  the  never-ending  struggle  between  the  employers  of 
labor  and  the  wage-working  class.  The  members  of  the  wage- working 
class,  as  a  rule,  have  but  one  means  of  existing  in  the  present  capitalist 
state,  viz.,  the  sale  of  their  labor  power  to  the  employing  class.  The 
employer  uses  the  labor  power  of  the  worker  for  one  purpose,  to  oper- 
ate the  machinery,  or  develop  the  resources,  to  which  he  has  the  title 
of  ownership,  and  over  which  he  has  control. 

In  employing  labor  he  is  guided  by  exactly  the  same  principle  that 
directs  him  in  the  purchase  of  raw  materials,  or  undeveloped  resources, 
namely,  to  purchase  the  labor  power  necessary  to  his  purpose,  and  pay 
as  little  for  it  as  possible. 

The  workers,  on  the  other  hand,  are  driven  by  every  circumstance 
to  strive  for  as  much  as  they  can  obtain  of  the  values  they  create. 
For  upon  the  amount  which  they  as  workers  so  obtain  depends  the 
very  existence  of  themselves  and  those  dependent  upon  them.  The 
necessities  of  life,  the  degrees  of  comfort,  of  pleasure,  of  intellectual 
advancement,  and  of  physical  well-being;  in  short,  their  standard  of 
living  must  ine\itably  depend  upon  the  amount  of  the  working  wage. 

The  employer,  the  buyer  of  labor  power  in  the  labor  market,  desires 
large  returns  in  the  shape  of  profits  upon  his  investment.  Large 
profits  in  capitalist  production  in  the  last  analysis  mean  but  one  thing, 
low  wages,  and  generally  inferior  working  conditions,  for  the  class 
that  exists  through  the  sale  of  its  labor  power.  Higher  wages  and 
improved  working  conditions,  as  a  rule,  mean  smaller  profits.  These 
opposing  economic  forces,  each  striving  to  advance  its  own  interests, 
are  engaged  in  a  never-ending  struggle  for  supremacy  in  the  field 
of  production.  A  large  majority  of  the  working  class  today  do  not 
understand  the  struggle  in  which  they  are  engaged,  nor  the  cause  from 
which  it  springs — the  opposed  economic  interests  of  themselves  and 
the  capitalist  class.  As  a  result,  in  struggling  for  what  they  think 
are  their  interests,  they  fight  in  the  dark,  and  thus  have  contributed 
and  still  contribute  to  their  own  defeat  and  continued  subjection, 
directly  and  indirectly. 

This,  then,  makes  it  imperative  that  the  Industrial  Union,  to 
fulfil  its  mission  as  an  organization  of  the  working  class,  must  take  its 

'  Adapted  from  the  pamphlet,  hidustrial  Unionism  and  the  I .W .W .,  by  Vincent 
St.  John.     Press  of  the  I.W.W.  Publishing  Bureau. 


LABOR  PROBLEMS  701 

stand  upon  a  recognition  of  this  struggle.  It  must  educate  its  mem- 
bership to  a  complete  understanding  of  the  principles  and  causes 
underlying  every  struggle  between  the  two  opposing  classes. 

The  craft  plan  of  organization  is  a  relic  of  an  obsolete  stage  in  the 
evolution  of  capitalist  production.  At  the  time  of  its  inception  it 
corresponded  to  the  development  of  the  period:  the  productive 
worker  in  a  given  industry  took  the  new  raw  material,  and  with  the 
tools  of  the  trade,  or  craft,  completed  the  product  of  that  industry, 
performing  every  necessary  operation  himself.  As  a  result,  the 
workers  combined  in  organizations,  the  lines  of  which  were  governed 
by  the  tools  that  they  used.  At  that  period  this  was  organization. 
Today,  in  view  of  the  specialization  of  the  process  of  production, 
the  invention  of  machinery,  and  the  concentration  of  ownership,  it  is 
no  longer  organization,  but  division.  And  division  on  the  economic 
field  for  the  worker  spells  defeat  and  degradation. 

Take  a  leading  industry  of  this  country  today,  as  a  concrete 
example,  and  see  what  craft  division  means  to  the  workers  in  that 
industry;  the  railroad  industry  for  instance.  In  order  to  operate  a 
railroad  the  labor  of  many  workers  is  required.  They  are  divided 
into  the  following  organizations  operating  upon  the  theory  that  the 
interests  of  the  railroad  corporation  and  of  their  particular  organiza- 
tion are  identical:  the  engineers  in  the  Brotherhood  of  Locomotive 
Engineers;  the  firemen  in  the  Brotherhood  of  Locomotive  Firemen 
and  Engineers;  the  conductors  in  the  Order  Railway  Conductors; 
the  brakemen  in  the  Brotherhood  Railway  Trainmen;  the  switchmen 
in  the  Switchmen's  Union;  the  freight  handlers  in  another  organiza- 
tion; the  telegraphers  in  another;  the  section  men  in  another;  the 
machinists,  boiler-makers,  car-repairers  in  separate  organizations. 
The  rest  of  the  workers  are,  for  the  most  part,  without  organization 
at  all.  The  reason  for  this  is  that  the  organizations  above-named 
make  no  attempt  to  fortify  their  own  position  by  organizing  the  unor- 
ganized workers  in  the  industry.  They  are  under  the  false  belief 
that  their  own  organization  is  sufficient  in  and  by  itself. 

Each  of  the  above-named  organizations  is  working  under  a  con- 
tract for  a  certain  length  of  time.  Their  membership  is  bound  by 
the  organizations  to  remain  at  work  so  long  as  the  railroad  company 
lives -up  to  the  terms  of  the  contract,  and,  for  the  most  part,  the 
contracts  of  the  difi'erent  periods.  The  railroad  management  is  thus 
insured  against  having  to  subjugate  more  than  a  part  of  its  employees 
at  any  given  time.    The  result  of  this  condition  of  affairs  is  that  when- 


702  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

ever  any  branch  of  the  workers  in  this  industry  enters  into  a  conflict 
with  the  employer,  they  have  not  only  to  combat  the  resources  of 
that  employer,  but  also  their  fellow-workers  in  the  same  industry 
who  remain  at  work,  and  assist  the  employer  in  the  operation  of  the 
railroad.  In  every  instance,  the  defeat  is  due  to  the  lack  of  united 
action  by  the  workers,  part  of  them  being  compelled  to  remain  at 
work  in  observance  of  their  sacred  agreement  with  the  employer. 
They  are  simply  blinded  by  the  wrong  principles  and  methods  of  their 
organizations. 

Contrast  this  state  of  affairs  with  what  would  be  the  case,  were 
these  workers  organized  on  the  plan  of  the  I.W.W.,  and  educated  in 
the  principles  on  which  it  is  based.  The  railway  workers  operating 
from  any  given  division  point  would  be  organized  under  one  charter, 
covering  that  industry  for  that  division,  a  local  Industrial  Union  of 
Transportation  Workers.  The  workers  composing  that  local  indus- 
trial union  would  be  branched,  so  as  to  permit  the  workers  of  each 
department  to  meet,  discuss  and  decide  all  questions.  For  instance, 
the  engineers  and  firemen,  would  meet  as  such  to  discuss  and  decide 
upon  tlie  conditions  concerning  the  working  conditions  of  their  respec- 
tive departments.  The  train  crew  would  do  Likewise.  Cooks,  waiters, 
and  porters  would  form  another  branch  for  the  purpose  of  legislation  as 
to  their  working  conditions,  and  so  on,  with  depot  employees,  tele- 
graphers, dispatchers  and  towermen,  machinists,  boilermakers  and 
repairmen,  trackwalkers  and  sectionmen,  yardmen,  switchmen, 
flagmen,  and  crossing- tenders — until  all  the  employees  in  that  industry 
were  organized  in  the  branches  to  which  they  belonged  by  reason  of 
the  particular  department  in  which  they  worked.  Each  branch 
would  be  represented  in  the  Industrial  Union  by  a  delegate  or  dele- 
gates. These  branches  would  be  integral  parts  of  the  local  Industrial 
Union.  These  delegates,  upon  meeting,  would  discuss  the  instructions 
received  from  the  branches,  confer  together  as  representatives  of  the 
industry,  and  formulate  the  working  conditions  for  the  industry  as  a 
whole  into  demands.  A  representative  of  each  branch  would  consti- 
tute the  committee  that  would  appear  before  the  railroad  managers, 
receive  their  reply  and  report  back  to  the  membership  they  repre- 
sented. The  membership  would  then  decide  upon  their  course  of 
action,  and  instruct  their  local  industrial  union  through  its  committee 
to  proceed  to  carry  such  decision  into  effect.  Wherever  necessary, 
the  question  would  be  taken  up  to  the  National  Industrial  Union, 
composed  of  all  local  transportation  industrial  imions.    Thus,  when 


LABOR  PROBLEMS  703 

necessary,  united  action  of  the  workers  would  result  in  the  entire 
industry.  If,  in  order  to  enforce  their  demands,  it  became  necessary 
to  cease  work,  a  vastly  different  state  of  things  from  that  first  men- 
tioned would  confront  the  railway  management.  No  part  of  the 
workers  would  be  found  as  union  men  assisting  in  the  operation  of  a 
scab  railroad,  for  the  simple  reason  that  correct  principles,  backed 
up  by  correct  and  up-to-date  organization,  would  have  prepared  the 
way  for  united  action  on  the  part  of  the  workers  in  that  industry. 
The  Industrial  Workers  of  the  World  is  in  existence  to  gain  control 
of  the  machinery  of  production,  and  then  to  operate  it,  distributing 
the  wealth  so  produced  to  all  who  by  brain  or  muscle  have  contributed 
in  producing  the  joint  product.  To  make  possible  the  achievement  of 
this  result  it  offers  the  following  Preamble  as  a  statement  of  its 
principles: 

The  working  class  and  the  employing  class  have  nothing  in  common. 
There  can  be  no  peace  so  long  as  hunger  and  want  are  found  among  millions 
of  the  working  people  and  the  few,  who  make  up  the  employing  class,  have 
all  the  good  things  of  life. 

Between  these  two  classes  a  struggle  must  go  on  until  the  workers  of  the 
world  organize  as  a  class,  take  possession  of  the  earth  and  the  machinery 
of  production,  and  abolish  the  wage  system. 

We  find  that  the  centering  of  the  management  of  industries  into  fewer 
and  fewer  hands  makes  the  trade  unions  unable  to  cope  with  the  ever-grow- 
ing power  of  the  employing  class.  The  trade  unions  foster  a  state  of  affairs^ 
which  allows  one  set  of  workers  to  be  pitted  against  another  set  of  workers 
in  the  same  industry,  thereby  helping  defeat  one  another  in  wage  wars. 
Moreover,  the  trade  unions  aid  the  employing  class  to  mislead  the  workers 
into  the  belief  that  the  working  class  have  interests  in  common  with  their 
employers. 

These  conditions  can  be  changed  and  the  interest  of  the  working  class 
upheld  only  by  an  organization  formed  in  such  a  way  that  all  its  members 
in  any  one  industry,  or  in  all  industries  if  necessary,  cease  work  whenever  a 
strike  or  lockout  is  on  in  any  department  thereof,  thus  making  an  injury  to 
one  an  injury  to  all. 

Instead  of  the  conservative  motto,  "A  fair  day's  wages  for  a  fair  day's 
work,"  we  must  inscribe  on  our  banner  the  revolutionary  watchword, 
"Abolition  of  the  wage  system." 

It  is  the  historic  mission  of  the  working  class  to  do  away  with  capitalism. 
The  army  of  production  must  be  organized,  not  only  for  the  everyday 
struggle  with  capitalists,  but  also  to  carry  on  production  when  capitalism 
shall  have  been  overthrown.  By  organizing  industrially  we  are  forming  the 
structure  of  the  new  society  within  the  shell  of  the  old. 


704  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

And  as  a  working  program  by  which  to  build,  it  proposes  the  fol- 
lowing rules: 

All  power  vests  in  the  general  membership  through  the  initiative  and 
referendum  and  the  right  of  repeal  and  recall. 

Universal  transfer  system  and  recognition  of  cards  of  union  workers  of 
all  countries;  one  initiation  fee  to  be  all  that  is  required,  and  this  is  to  be 
placed  at  such  a  figure  that  no  worker  will  be  prevented  from  becoming  a 
union  man  or  woman  because  of  its  amount. 

A  universal  label,  badge,  button,  and  membership  card,  thus  promoting 
the  idea  of  solidarity  and  unity  amongst  the  workers. 

A  defense  fund  to  which  all  members  shall  contribute. 

The  final  aim  of  the  industrial  union  will  be  to  place  the  working  class 
in  possession  of  the  wealth-producing  machinery,  mills,  workshops,  factories, 
raihoads,  etc.,  that  the  labor  of  the  working  class  has  created. 

This  aim  cannot  be  accomplished  while  the  workers  are  divided  upon 
the  field  of  production,  as  they  have  been  in  the  past  and  are  today.  It  can- 
not be  accomplished  until  the  workers,  in  an  organization  of  and  by  the 
working  class  alone,  educate  themselves  to  carry  on  production  in  their 
own  behalf. 

Until  suflficient  numbers  of  the  workers  are  educated  to  accomplish 
this  task,  the  battle  of  the  worker  in  capitalist  society  must  be  fought,  and 
industrial  unionism  offers  the  only  weapon  with  which  the  worker  can  hope 
to  successfully  combat  the  power  of  the  employing  class  on  the  economic 
field. 


LABOR  PROBLEMS 


70s 


204.    STATISTICS  OF  THE  EXTENT  OF  STRIKES' 

Strikes,  Establishments  Involved,  Strikers,  and  Employees  Thrown  Out  of 

Work,  by  Years,  i88i  to  1905 


Strikes 

Establishments 

Strikers 

Employees  Thrown 
Out  of  Work 

YEAR 

Number 

Average 
per  strike 

Number 

Average 
per  strike 

Number 

Average 
per  strike 

i88r 

1882 

1883 

1884 

1885 

1886 

1887 

1888 

1889 

1890 

1891 

1892 

1893 

1894 

1895 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

471 
454 
478 
443 
645 
1,432 
1,436 
906 

1,075 
1,833 
1,717 
1,298 

1,305 
1,349 
1,215 
1,026 

1,078 
1,056 
1,797 
1,779 
2,924 
3,162 

3,494 
2,307 
2,077 

2,928 
2,105 
2,759 
2,367 
2,284 
10,053 

6,589 
3,506 
3,786 

9,424 
8,116 
S,540 

4,555 
8,196 

6,973 
5,462 

8,492 

3,809 
11,317 

9,248 
10,908 
14,248 
20,248 
10,202 

8,292 

6 
4 
5 
5 
3 
7 
4 
3 
3 
5 
4 
4 
3 
6 

5 
5 
7 
3 
6 

5 
3 
4 
5 
4 
4 

2 
6 
8 
3 
5 
0 

6 
9 
5 

I 

7 
3 
5 

I 

7 
3 
9 
6 

3 
2 

7 
5 
8 

4 
0 

101,070 
120,860 
122,198 
117,313 
158,584 
407,152 
272,776 
103,218 
205,068 
285,900 
245,042 

163,499 
195,008 

505,049 
285,742 
183,813 
332,570 
182,067 
308,267 
399,656 
396,280 

553,143 
531,682 

375,754 
176,337 

215 
266 
256 
265 
246 
284 
190 
114 
191 
156 

143 
126 

149 
374 
23s 
179 
309 
172 
172 
225 
136 
175 
152 
163 
85 

129,521 
154,671 
149,763 
147,054 
242,705 
508,044 
379,676 
147,704 
249,559 
351,944 

298,939 
206,671 

265,914 
660,425 

392,403 
241,170 
408,391 
0)249,002 
417,072 
505,066 
543,386 
659,792 
656,055 
517,211 
2  21,686 

275 
341 
313 
332 

376 

355 
264 

163 
232 
192 

174 

159 
204 

490 
323 
235 
379 
0)236 

232 
284 
186 
209 
188 
224 
107 

Total. . . 

36,757 

181,407 

4-9 

6,728,048 

183 

0)8,703,824 

0)237 

a)  Not  including  two  strikes  involving  33  establishments  not  reported. 

'  From  the  Twenty-first  Annual  Report  [1906]  of  the  U^.  Commissioner  of 
Labor,  p.  15. 


7o6 


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LABOR  PROBLEMS 


707 


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7o8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

2o6.    ESTIMATES  OF  LOSSES  DUE  TO  STRIKES  AND  LOCKOUTS 

a)   TW'ENTY   YEARS   OF   LOSSES   FROM    STRIKES   AND    LOCKOUTS' 


Strikxs 

Lockouts 

Year 

To  Date  whei)  Strikers 
Were  Re-employed  or 
Employed  Elsewhere 

To  Date  When  Employees 
Locked  Out  Were  Re-em- 
ployed or  Employed 
Elsewhere 

Loss  of  Em- 
ployers 

Loss  of  Em- 

ployers 

Assistance 

Assistance 

Wage  Loss  of 

to  Employees 

Wage  Loss  of 

to  Employees 

Employees 

by  Labor  Or- 
ganizations 

Employees 

by  Labor  Or- 
ganizations 

1881... 

1  3.372.578 

$    287.999 

$1,919,483 

$      18,519 

$     3,150 

$     6,960 

1882... 

9,864,228 

734,339 

4,269,094 

466,34s 

47,668 

112,381 

18S3... 

6,274,480 

461.233 

4.696,027 

1,069,212 

102,253 

297,097 

1884... 

7,666,717 

407,871 

3.393,073 

1,421,410 

314,027 

640,847 

1885... 

10,663,248 

465.827 

4,388,893 

901,173 

89,488 

455,477 

1886... 

14,992.453 

1,122,130 

12,357,808 

4,281,058 

549,452 

1,949,498 

1887... 

16,560,534 

1.121,554 

6,698,49s 

4.233.700 

155,846 

2,819,736 

1888... 

6.377,/49 

1,752,668 

6,509,017 

1,100,057 

85,931 

1,217,199 

1889... 

10,409,686 

592,017 

2.936,752 

1,379,722 

115.389 

307,125 

1890. . . 

13,875.338 

910,28s 

5,135,404 

957,966 

77.210 

486,258 

1891... 

14, 80 1,, SOS 

1.132,557 

6,176,688 

883,709 

50.195 

616,888 

1892. . . 

10,772,622 

833.874 

5,145.691 

2,856,013 

537,684 

1,695,080 

1893... 

9,938,048 

563,183 

3,406,19s 

6,659,401 

364,268 

1,034,420 

1894... 

37.145.532 

931,052 

18,982,129 

2,022,769 

160,244 

982,584 

1895... 

13.044,830 

559.165 

5,072,282 

791.703 

67,701 

584.155 

1896... 

11,098,207 

463,165 

5.304,23s 

690,945 

61,355 

357.535 

1897... 

17,468,904 

721,164 

4,868,687 

583,606 

47.326 

298,044 

1898... 

10,037,284 

585,228 

4,596,462 

880,461 

47.098 

239.403 

1899- •■ 

15. 157.96s 

1,096,030 

7,443,407 

1,485,174 

126,957 

379.365 

1900. . . 

18,341.570 

1,434.452 

9,431,299 

16,136,802 

448,219 

5.447,930 

Total 

$257,863,478 

$16,174,793 

$132,731,121 

$48,819,745 

$3,451,461 

$19,927,983 

b)   LOSSES  FROM   THE   ANTHRACITE   COAL   STRIKE    OF    1902* 

It  is  impossible  to  state  with  accuracy  the  losses  occasioned  by 
the  strike,  but  fair  estimates  may  be  given.  The  total  shipments 
of  anthracite  coal  in  1902,  according  to  a  statement  by  Mr.  Wm. 
W.  Ruley,  Chief  of  the  Bureau  of  Anthracite  Coal  Statistics,  were 
31,200,890  long  tons.  As  compared  with  1901,  when  the  shipments 
amounted  to  53,568,601  long  tons,  this  indicates  a  decrease  of  22,  367,- 
711  long  tons,  or  over  40  per  cent.  If  the  same  decrease  is  assumed 
for  the  coal  mined  for  local  trade  and  consumption,  the  total  decrease 
in  production  in  1902  amounted  to  24,604,482  long  tons,  which  at  the 
price  received  in  1901  meant  a  decrease  in  the  receipts  of  the  coal- 
mining companies,  for  their  product  at  the  mines,  of  $46,100,000. 
Assuming  the  average  wage  cost  to  be  about  $1 .  25  per  ton  on  market- 

■  From  the  Sixteenth  Annual  Report  [1901]  of  the  U.S.  Commissioner  of  Labor, p.  24. 

'  From  the  "Report  of  the  Anthracite  Coal  Strike  Commission,"  Bulletin  of 
the  U.S.  Bureau  of  Labor,  VIII,  463. 


LABOR  PROBLEMS  709 

able  coal,  and  allowing  for  the  wages  paid  to  engineers,  pumpmen, 
and  others  who  remained  at  work  during  the  strike,  the  mine  em- 
ployees lost  in  wages  a  total  of  about  $25,000,000. 

It  may  also  be  mentioned  that,  according  to  reports  made  at 
the  recent  convention  of  mine  workers  in  Indianapolis,  there  were 
expended  about  $1,800,000  in  relief  funds. 

Assuming  that  60  per  cent  of  the  total  shipment  represents  the 
sizes  above  pea  coal,  the  decrease  in  the  shipments  of  these  larger 
sizes  in  1902,  as  compared  with  1901,  was  13,420,627  long  tons. 
With  an  average  price  at  New  York  Harbor  of  $4 .  09  per  ton,  and  with 
35  per  cent  of  the  receipts  charged  to  transportation  expenses,  the 
decrease  in  freights  paid  to  the  railroad  companies  on  these  larger 
sizes,  if  it  had  all  been  sent  to  New  York  Harbor,  would  have  been 
about  $19,000,000;  and  assuming  the  freight  rate  of  $1  per  ton  on 
the  smaller  sizes,  the  total  decrease  in  freight  receipts  of  the  trans- 
portation companies  would  have  been  about  $28,000,000. 


207.    UNEMPLOYMENT  AND  A  PROPOSED  SOLUTION  OF 

THE  PROBLEM* 

We  have,  therefore,  to  report: 

1.  That  distress  from  want  of  employment,  though  periodically 
aggravated  by  depression  of  trade,  is  a  constant  feature  of  industry 
and  commerce  as  at  present  administered;  and  that  the  mass  of  men, 
women,  and  children  suffering  from  the  privation  due  to  this  unemploy- 
ment in  the  United  Kingdom  amounts,  at  the  best  of  times,  to  hun- 
dreds of  thousands,  while  in  years  of  trade  depression  they  must 
exceed  a  million  in  number. 

2.  That  this  misery  has  no  redeeming  feature.  It  does  not,  like 
the  temporary  hardships  of  work  or  adventure,  produce  in  those 
capable  of  responding  to  the  stimulus,  greater  strength,  energy, 
endurance,  fortitude,  or  initiative.  On  the  contrary,  the  enforced 
idleness  and  prolonged  privation  characteristic  of  unemployment 
have,  on  both  the  strong  man  and  the  weak,  on  the  man  of  character 
and  conduct,  and  on  the  dissolute,  a  gravely  deteriorating  effect  on 
body  and  mind,  on  muscle  and  will.  The  magnitude  of  the  loss  thus 
caused  to  the  nation,  first  in  the  millions  of  days  of  enforced  idleness 
of  productive  laborers,  and  secondly  in  the  degradation  and  deteriora- 

'  Adapted  from  the  minority  report  of  the  Royal  Commission  on  the  Poor 
Laws  (1909),  pp.  1177-78  and  1215-17. 


7IO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

tion  of  character  and  physique — whether  or  not  it  is  increasing — can 
scarcely  be  exaggerated. 

3.  That  men  in  distress  from  want  of  employment  approximate 
to  one  or  other  of  four  distinct  types,  requiring  distinct  treatment; 
namely,  the  men  from  permanent  situations,  the  men  from  discontinu- 
ous employment,  the  underemployed,  and  the  unemployable. 

4.  That  what  is  needed  for  the  men  from  permanent  situations, 
is  some  prompt  and  gratuitous  machinery  for  discovering  what  open- 
ings exist,  anywhere  in  the  United  Kingdom,  for  their  particular 
kind  of  service;  or  for  ascertaining  with  certainty  that  no  such  open- 
ings exist;  with  suitable  provision,  where  individual  saving  does  not 
suffice,  for  the  maintenance  of  themselves  and  their  households  whilst 
awaiting  re-employment.  Both  the  machinery  and  the  provision  are 
at  present  afforded,  in  some  industries,  by  trade-union  "Vacant 
Books"  and  trade-union  insurance.  This,  however,  does  not  meet 
the  need  of  the  large  numbers  of  men  in  occupations  for  which  no 
trade-union  exists,  or  in  which  no  machinery  for  reporting  vacancies 
and  no  insurance  against  unemployment  have  been  organized.  Nor 
does  it  meet  the  cases,  unhappily  always  occurring  in  one  industry 
or  another,  of  men  whose  occupation  is  being  taken  from  them  by 
the  adoption  of  new  processes  or  new  machinery,  without  any  effective 
opportunity  being  afforded  to  them  of  training  themselves  to  new 
means  of  livelihood. 

5.  That  for  the  men  of  discontinuous  employment  the  same 
prompt  and  gratuitous  machinery  for  discovering  what  openings 
exist,  anywhere  in  the  United  Kingdom,  is  required,  not  only  for 
individuals  exceptionally  unemployed,  but  for  the  entire  class,  at  all 
times;  in  order  to  prevent  the  constant  "leakage"  of  time  between 
job  and  job,  and  to  obviate  the  demoralizing  aimless  search  for  work, 
whether  over  any  one  great  urban  aggregation,  or  by  means  of  wander- 
ing from  town  to  town.  The  same  machinery  becomes  imperative, 
in  times  of  bad  trade,  in  order  to  ascertain  with  certainty  that  no 
opportunity  of  employment  exists.  Without  some  such  machinery, 
experience  shows  that  insurance  against  unemployment  breaks  down, 
owing  to  the  excessive  amount  of  "time  lost"  between  jobs,  and  the 
impossibility  of  securing  that  every  claimant  has  done  his  best  to  get 
work. 

5.'  That  of  all  the  forms  of  unemployment,  that  which  we  have 
termed  under-employment,  extending,  as  it  does,  to  many  hundreds 

'  [This  duplication  of  the  paragraph  Dumber  appears  in  the  original. — 
Editoes.] 


LABOR  PROBLEMS  7ll 

of  thousands  of  workers,  and  to  their  whole  lives,  is  by  far  the  worst 
in  its  evil  effects;  and  that  it  is  this  system  of  chronic  under-employ- 
ment  which  is  above  all  other  causes  responsible  for  the  perpetual 
manufacture  of  paupers  that  is  going  on;  and  which  makes  the  task 
of  the  Distress  Committees  in  dealing  with  the  unemployed  of  other 
types — such  as  the  men  from  permanent  situations,  or  the  men  of 
discontinuous  employment — hopelessly  impracticable. 

6.  That  we  have  been  unable  to  escape  from  the  conclusion  that, 
owing  to  various  causes,  there  has  accumulated,  in  all  the  ports,  and 
indeed  in  all  the  large  towns  of  the  United  Kingdom,  an  actual 
surplus  of  workmen,  there  being  more  than  are  required  to  do  the 
work  in  these  towns  even  in  times  of  brisk  trade;  this  surplus  showing 
itself  in  the  existence  of  the  stagnant  pools  of  labor  that  we  have 
described,  and  in  the  chronic  under-employment  of  tens  of  thousands 
of  men  at  all  seasons  and  in  all  years. 

7.  That  we  have  been  struck  by  the  fact  that  this  chronic  under- 
employment of  men  is  coincident  with  the  employment  in  factories 
and  workshops,  or  on  work  taken  out  to  be  done  at  home,  of  a  large 
number  of  mothers  of  young  children  who  are  thereby  deprived  of 
maternal  care;  with  an  ever-growing  demand  for  boy-labor  of  an 
uneducational  kind;  and  actually  with  a  positive  increase  in  the 
number  of  "half-timers"  (children  in  factories  below  the  age  exempt- 
ing them  from  attendance  at  school).  Thus  we  have,  in  increasing 
numbers  (though  whether  or  not  in  increasing  proportion  is  not  clear), 
men  degenerating  through  enforced  unemployment  or  chronic  under- 
employment into  parasitic  unemployables;  and  the  burden  of  indus- 
trial work  cast  on  pregnant  women,  nursing  mothers,  and  immature 
youths. 

8.  That  the  task  of  dealing  with  unemployment  is  altogether 
beyond  the  capacity  of  authorities  having  jurisdiction  over  particular 
areas;  and  can  be  undertaken  successfully  only  by  a  department 
of  the  national  government. 

9.  That  the  experience  of  the  Poor  Law  in  dealing  with  destitute 
able-bodied  men  and  their  dependents;  of  the  Distress  Committees 
in  providing  for  laborers  out  of  employment;  of  the  police  in  attempt- 
ing to  suppress  vagrancy  and  "sleeping  out";  of  the  Prison  Com- 
missioners in  having  to  accommodate  in  gaol  large  numbers  of  men 
undergoing  short  sentences  for  offences  of  this  nature;  of  the  educa- 
tion and  public  health  authorities  in  feeding  and  medically  treating 
the  necessitous  dependents  of  able-bodied  men;  and  of  the  voluntary 


712  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

agencies  dealing  with  the  "houseless  poor"  of  great  cities,  all  alike 
prove  that  every  attempt  to  deal  only  with  this  or  that  section  of 
the  able-bodied  and  unemployed  class  is  liable  to  be  rendered  nugatory 
by  the  neglect  to  deal  simultaneously  with  the  other  sections  of  men 
in  distress,  or  claiming  to  be  in  distress,  from  want  of  employment. 
That  accordingly,  in  our  judgment,  no  successful  dealing  with  the 
problem  is  possible  unless  provision  is  simultaneously  made  in  ways 
suited  to  their  several  needs  and  deserts  for  all  the  various  sections 
of  the  unemployed  by  one  and  the  same  authority. 

SUMMARY    OF   PROPOSALS 

We  therefore  recommend: 

I.  That  the  duty  of  so  organizing  the  national  labor  market  as 
to  prevent  or  to  minimize  unemployment  should  be  placed  upon  a 
minister  responsible  to  Parliament,  who  might  be  designated  the 
Minister  for  Labor. 

3.  That  the  function  of  the  National  Labor  Exchange  should  be, 
not  only  (a)  to  ascertain  and  report  the  surplus  or  shortage  of  labor 
of  particular  kinds,  at  particular  places;  and  (b)  to  diminish  the 
time  and  energy  now  spent  in  looking  for  work,  and  the  consequent 
"leakage"  between  jobs;  but  also  (c)  so  to  "dovetail"  casual  and 
seasonal  employments  as  to  arrange  for  practical  continuity  of  work 
for  those  now  chronically  under-employed.  That  while  resort  to 
the  National  Labor  Exchange  might  be  optional  for  employers  filling 
situations  of  at  least  a  month's  duration,  it  should  (following  the 
precedent  of  the  Labor  Exchange  for  seamen  already  conducted  by 
the  Board  of  Trade  in  the  mercantile  marine  offices)  be  made  legally 
compulsory  in  certain  scheduled  trades  in  which  excessive  discon- 
tinuity of  employment  prevails;  and  especially  for  the  engagement 
of  casual  labor. 

5.  That,  in  order  to  secure  proper  industrial  training  for  the 
youth  of  the  nation,  an  amendment  of  the  Factory  Acts  is  urgently 
required  to  provide  that  no  child  should  be  employed  at  all  below 
the  age  of  fifteen;  that  no  young  person  under  eighteen  should  be 
employed  for  more  than  thirty  hours  per  week;  and  that  all  young 
persons  so  employed  should  be  required  to  attend  for  thirty  hours 
per  week  at  suitable  trade  schools  to  be  maintained  by  the  local 
education  authorities. 


LABOR  PROBLEMS  713 

7.  That  all  mothers  having  the  charge  of  young  children,  and  in 
receipt,  by  themselves  or  their  husbands,  of  any  form  of  public 
assistance,  should  receive  enough  for  the  full  maintenance  of  the 
family;  and  that  it  should  then  be  made  a  condition  of  such  assistance 
that  the  mother  should  devote  herself  to  the  care  of  her  children, 
without  seeking  industrial  employment. 

9.  That  in  order  to  meet  the  periodically  recurrent  general 
depressions  of  trade,  the  government  should  take  advantage  of  there 
being  at  these  periods  as  much  unemployment  of  capital  as  there  is 
unemployment  of  labor;  that  it  should  definitely  undertake,  as  far 
as  practicable,  the  regularization  of  the  national  demand  for  labor; 
and  that  it  should,  for  this  purpose,  and  to  the  extent  of  at  least 
£4,000,000  a  year,  arrange  a  portion  of  the  ordinary  work  required 
by  each  department  on  a  ten  years'  program;  such  £40,000,000 
worth  of  work  for  the  decade  being  then  put  in  hand,  not  by  equal 
annual  instalments,  but  exclusively  in  the  lean  years  of  the  trade 
cycle;  being  paid  for  out  of  loans  for  short  terms  raised  as  they  are 
required,  and  being  executed  with  the  best  available  labor,  at  standard 
rates,  engaged  in  the  ordinary  way. 

10.  That  in  this  ten  years'  program  there  should  be  included 
works  of  afforestation,  coast  protection,  and  land  reclamation;  to  be 
carried  out  by  the  Board  of  Agriculture  exclusively  in  the  lean  years 
of  the  trade  cycle;  by  the  most  suitable  labor  obtainable  taken  on  in 
the  ordinary  way,  at  the  rates  locally  current  for  the  work,  and  paid 
for  out  of  loans  raised  as  required. 

11.  That  the  statistical  and  other  evidence  indicates  that,  by 
such  measures  as  the  above,  the  greater  part  of  the  fluctuations  in 
the  aggregate  volume  of  employment  can  be  obviated;  and  the  bulk 
of  the  surplus  labor  manifesting  itself  in  chronic  under-employment 
can  be  immediately  absorbed,  leaving,  at  all  times,  only  a  relatively 
small  residuum  of  men  who  are,  for  various  reasons,  in  distress  from 
want  of  work. 

12.  That  with  a  lessened  discontinuity  of  employment,  and  the 
suppression  of  under-employment,  the  provision  of  out-of-work  bene- 
fit by  trade  unions  would  become .  practicable  over  a  much  greater 
range  of  industry  than  at  present;  and  its  extension  should,  as  the 
best  form  of  insurance  against  unemployment,  receive  government 
encouragement  and  support.  That  in  view  of  its  probable  adverse 
effect  on  trade-union  membership  and  organization,  we  are  unable 


714  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  recommend  the  establishment  of  any  plan  of  government  or 
compulsory  insurance  against  unemployment.  That  we  recommend, 
however,  that,  following  the  precedents  set  in  several  foreign  countries, 
a  government  subvention  not  exceeding  one-half  of  the  sum  actually 
paid  in  the  last  preceding  year  as  out-of-work  benefit  should  be 
offered  to  trade-unions  or  other  societies  providing  such  benefit,  in 
order  to  enable  the  necessary  weekly  contributions  to  be  brought 
within  the  means  of  a  larger  proportion  of  the  wage-earners. 

13.  That  for  the  ultimate  residuum  of  men  in  distress  from  want 
of  employment,  who  may  be  expected  to  remain,  after  the  measures 
now  recommended  have  been  put  in  operation,  we  recommend  that 
maintenance  should  be  freely  provided,  without  disfranchisement, 
on  condition  that  they  submit  themselves  to  the  physical  and  mental 
training  that  they  may  prove  to  require.  That  it  should  be  the  func- 
tion of  the  Maintenance  and  Training  Division  of  the  Ministry  of 
Labor  to  establish  and  maintain  receiving  offices  in  the  various  centers 
of  population,  at  which  able-bodied  men  in  distress  could  apply  for 
assistance,  and  at  which  they  would  be  medically  examined  and  have 
their  faculties  tested  in  order  to  discover  in  what  way  they  could  be 
improved  by  training.  They  would  then  be  assigned  either  to  suitable 
day-training  depots  or  residential  farm  colonies,  where  their  whole 
working  time  would  be  absorbed  in  such  varied  beneficial  training 
of  body  and  mind  as  they  proved  capable  of;  their  wives  and  families 
being,  meanwhile,  provided  with  adequate  home  aliment. 

15.  That  the  Maintenance  and  Training  Division  should  also 
establish  one  or  more  Detention  Colonies,  of  a  reformatory  type, 
to  which  men  \»ould  be  committed  by  the  magistrates,  and  com- 
pulsorily  detained  and  kept  to  work  under  discipline,  upon  conviction 
of  any  such  offences  as  vagrancy,  mendicity,  neglect  to  maintain 
family  or  to  apply  for  public  assistance  for  their  maintenance  if 
destitute,  repeated  recalcitrancy  or  breach  of  discipline  in  a  training 
establishment,  etc. 

16.  That  for  able-bodied  women,  without  husband  or  dependent 
children,  who  may  be  found  in  distress  from  want  of  employment, 
there  should  be  exactly  the  same  sort  of  provision  as  for  men.  That 
for  widows  or  other  mothers  in  distress,  having  the  care  of  young 
children,  residing  in  homes  not  below  the  national  minimum  of  sani- 
tation, and  being  themselves  not  adjudged  unworthy  to  have  children 
entrusted  to  them,  there  should  be  granted  adequate  home  aliment 


LABOR  PROBLEMS 


715 


on  condition  of  their  devoting  their  whole  time  and  energy  to  the  care 
of  the  children.  That  for  the  childless  wives  of  able-bodied  men  in 
attendance  at  a  training  establishment,  adequate  home  aliment  be 
granted,  conditional  on  their  devoting  their  time  to  such  further 
training  in  domestic  economy  as  may  be  prescribed  for  them. 


208.    SEASONAL  UNEMPLOYMENT 

Average  Percentages  of  Unemployment  at  the  End  of  Each  Month, 
According  to  English  Trade  Union  Figures,  1897-1906' 

10%  [      \      \      I       \      \      \      \      \      \      \      r=5  Shipbuilding 


.    0% 


Furnishing 


Carpenters  and 
Joiners 


Tobacco 


Clothing 


'  The  data  as  given  in  Sidney  Webb's  Introduction  to  Seasonal  Trades,  p.  39. 
Constable  &  Co.,  19 12. 


7i6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

209.    LONG  HOURS  VERSUS  EFFICIENCY' 

Perliaps  the  most  significant  study  ever  published  on  the  subject 
of  the  relation  between  fatigue  and  the  output  of  working-men  is  that 
which  was  set  forth  in  two  lectures  before  the  Jena  Society  for  Political 
Economy,  in  1901,  by  Ernst  Abbe,  physicist,  university  professor, 
inventor  of  the  first  rank,  and  owner  of  a  world-famous  manufacturing 
plant — the  Carl  Zeiss  optical  works  at  Jena. 

When  Abbe  entered  the  Zeiss  firm,  in  1870,  the  workday  had  been 
twelve  hours  long.  It  was  gradually  reduced,  reaching  nine  hours  in 
1891.  Nine  years  later  it  was  further  shortened  to  eight  hours,  for 
the  purpose  of  discovering,  by  a  year's  trial,  the  effect  on  output. 

Abbe  was  familiar  with  the  British  experiments  in  reducing  the 
length  of  the  workday,  and  had  been  particularly  impressed  by  the 
experience  of  the  Woolwich  Arsenal  in  changing  from  nine  to  eight 
hours  without  loss  or  decrease  in  output.  The  general  similarity 
and  consensus  of  English  experience  on  the  benefits  of  the  short  day 
to  output,  organization,  and  invention  seemed  to  Abbe  presumptive 
evidence  of  its  truth.  But  he  realized  that  specific  statistical  proofs 
of  increased  efl5ciency  under  the  eight-hour  regime  were  still  needed, 
and  he  published  the  careful  records  and  statistics  of  the  Zeiss  Works 
precisely  to  corroborate  more  exactly  the  general  principles  empirically 
learned  in  British  mills  and  factories. 

The  effects  of  the  change  from  nine  to  eight  hours  were  measured 
by  comparing  the  earnings  of  piece-workers  during  the  year  before 
and  the  year  after  the  change.  In  order  to  make  the  comparison  as 
accurate  as  possible  and  to  eliminate  chance  variations,  great  care 
was  taken  to  omit  all  workers  whose  output  might  have  been  affected 
by  special  individual  causes.  The  comparison  was  limited  to  workers 
who  had  been  in  the  firm's  employ  four  years,  and  who  were  over 
twenty-two  years  old.  All  workers  were  ruled  out  who  had  lost 
more  than  300  hours  during  the  year  on  account  of  sickness  or  other 
reasons.  About  20  others  were  not  counted  because  their  health 
seemed  below  par.  This  left  233  workmen  whose  work  during  the 
trial  year  could  fairly  be  compared  with  the  year  before  and  could  be 
expected  to  show  the  effect  of  the  reduction  of  hours.  Thanks  to  the 
careful  system  of  accounting,  showing  for  years  back  the  daily  indi- 
vidual earnings  of  men  at  piece-  and  time-work,  the  following  figures 
were  available. 

'  From  Josephine  Goldmark,  Fatigue  and  Efficiency,  pp.  155-65.  Survey  Asso- 
ciates (publishers  for  the  Russell  Sage  Foundation),  191 2. 


LABOR  PROBLEMS 


717 


Comparison  of  Hourly  Earnings  of  233  Piece- Workers  in  the  Zeiss 

Optical  Works 

in  the  last  year  of  the  nine-hour  system  (april  i,  1899 — april  i,  iqoo)  and 
in  the  first  year  of  the  eight-hour  system  (april  i,  iqoo — april  i,  iqol) 


Year 

Total  Number  Piece-Work 
Hours 

Earnings, 
m  Marks 

Earnings  per 
Hour,  in  Pfennigs 

Ratio  of 
Increase 

I 899-1 900. . . 
1900-1901 . . . 

559,169 
Average  per  man  2400 

509,599 
Average  per  man  2187 

345.899 
366,484 

61.9 

71.9 

100:116.2 

Now  if  the  men,  in  eight  hours,  had  earned  exactly  the  same  as 
in  nine  hours,  piece  prices  remaining  the  same,  then  hourly  earnings 
would  have  had  to  increase  in  the  ratio  of  8:9  or  100:112.5.  But 
as  a  matter  of  fact,  the  hourly  earnings  increased  in  the  ratio  of 
100:116.2.  During  the  trial  year,  therefore,  wages  were  more  than 
equal  to  those  of  the  previous  year.  There  Vas  an  increase,  as  shown 
above,  of  3  per  cent.  This  means  that  in  eight  hours  the  daily 
output  was  one-thirtieth  more  than  in  nine  hours.  In  other  words, 
during  the  trial  year  30  men  did  the  work  that  31  men  had  done 
previously.  Each  man  did  ten  days'  more  work  during  the  year 
of  shorter  hours. 

This  increase  in  efficiency  was  not  confined  to  any  one  class  of 
workers,  nor  was  it  particularly  influenced  by  the  ages  of  the  workers. 
The  following  table  shows  the  ages  of  the  233  workers  under  discussion, 
and  how  nearly  uniform  was  their  increase  in  efficiency  in  the  shorter 
day. 

Increase  in  Efficiency  Under  the  Eight-Hour  Day  of  233  Piece-Workers 
AT  the  Zeiss  Optical  Works — Classified  by  Ages 

(Ages  Were  Reckoned  from  April  i,  1900.    Length  of  Service  Reckoned  according 
to  Years  Spent  in  the  Firm's  Employ  after  the  Eighteenth  Birthday) 


AOES 


No.  of 
Workmen 


Average 
Ages 


Average 
Length 
Service 


Average  Piece- 

RaTE    EAR>fINGS  PER 

Hour  in  Pfennigs 


Q-Hour 
Day 


8-Hour 
Day 


Ratio  op 

Increase 


22-25. •■ 
25-30- • ■ 
30-35--- 
35-40- ■• 
Over  40 . 


34 
69 
69 
40 
21 


23 
27 

32 

37 
45 


5-5 

7-9 

10. -I 

12.7 

15-3 


55-3 
62.2 

65.1 
60.6 

63-3 


65.2 
72.6 
74.8 
70.2 
74-3 


100:117.9 
100:116.7 
100:114.9 
100:115.8 
100:117.4 


Total. 


233 


31-6'' 


9.6t 


61.9 


71.9 


100:116.2 


^Maximum  53,  minimum  22  years. 


t  Maximum  33,  minimum  4  years. 


7i8 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


A  second  classification  divides  the  233  workers  in  question  accord- 
ing to  their  special  kinds  of  work.  It  shows  that  the  efficiency  of  all 
increased  in  about  the  same  proportion,  though  the  work  ranged  from 
the  most  delicate  and  highly  skilled  technical  processes  to  the  ordinary 
operations  of  wood-turning,  polishing,  etc. 

The  most  interesting  fact  that  emerges  from  this  table  is  that 
the  largest  increase  in  efficiency  occurred  in  the  coarser  kinds  of  work. 
Groups  4,  7,  and  11,  which  comprise  almost  entirely  machine  workers, 
showed  the  greatest  improvement.  Only  one  small  group  of  20 
workers,  highly  skilled  hand  grinders,  did  not  produce  or  earn  as 
much  in  eight  hours  as  in  nine.    They  failed  by  3  per  cent. 

Increase  in  Efficiency  of  the  233  Workers — Classified  by  Occupation 


Occupation 


Optical  Operations: 

1.  Lens-setters:        Fine    hand- 

work   

2.  Microscope  grinders,  etc. . . . 

3.  Other  hand  grinders  and  cen- 

terers,   entirely   handwork 

4.  Machine    grinders,    entirely 

naachine  work 

Mechanical  and  Auxiliary  Work: 

5.  Adjusting     rooms,     entirely 

handwork 

6.  Mounting      rooms,      chiefly 

handwork 

7.  Turning  and  milling,  entirely 

machine  work 

8.  Polishers  and  lacquerers,  en- 

tirely handwork 

9.  Engraving,     entirely    hand 

work 

10.  Molders,  entirely  handwork. 

11.  Carpenters,  part  hand,  part 

machine , 

12.  Case    makers,    chiefly  hand 

work 


0) 

0  ^ 
oftH 

CO 

< 

& 

d 

> 

< 

Aver  ge 
Length  Serv- 
ice: Years 

Earnings 

PER  Hour 

IN  Pfennigs 

Ratio  of 

9-Hour 
Day 

8-Hour 
Day 

Increase 

21 

311 

12.7 

72.8 

84.9 

100:116.6 

20 

33-2 

13-8 

79.1 

86.5 

100:109.4 

59 

26.1 

7-5 

60.4 

705 

100:116.7 

19 

32.1 

5-8 

52.2 

62.0 

100:118.8 

22 

31-7 

8.2 

65.5 

76.7 

100:117.1 

20 

36.9 

II. 6 

66.6 

78. 5 

100:117.9 

23 

35-2 

11. 1 

57-6 

68.0 

100:118. I 

17 

34-7 

II  .2 

53-8 

633 

100:117.7 

5 
6 

27.  2 
36.2 

6.8 
9-7 

56.1 
56 -4 

66.9 
64.8 

100:119.3 
100:114.9 

15 

35-2 

lO-S 

523 

62.9 

100:120.3 

6 

30.4 

6.4 

55-7 

62.8 

100:112.7 

233 

31-6 

9.6 

61 .9 

71.9 

100:116.2 

One  more  table  of  figures,  and  we  can  turn  to  the  argument  which 
Abbe  based  upon  his  statistics.  He  sought  for  corroboration  of  the 
astonishing  fact  that  eight  hours'  work  not  only  equalled  but  exceeded 
nine  hours'  work,  and  he  found  it  in  a  perfectly  objective  standard  of 


LABOR  PROBLEMS  719 

measurement;  that  is,  the  amount  of  power  used  during  the  four 
weeks  before  and  four  weeks  after  the  introduction  of  the  eight-hour 
day. 

The  650  different  machines  in  the  Zeiss  Works  were  driven  by 
one  central  dynamo  (not  connected  with  the  lighting).  The  amount 
of  power  used  was  determined  by  hourly  readings  of  a  wattmeter. 
In  regard  to  the  expenditure  of  power,  Abbe  makes  a  distinction 
between  the  actual  amount  used,  when  it  is  transmitted  and  the 
machines  are  in  operation,  and  the  so-called  "waste"  of  power, 
when  the  plant  is  "running  dead,"  as  it  is  called;  that  is,  when 
power  is  turned  on  and  available  but  the  machines  are  not  in  use — as 
just  before  work  begins,  etc. 

The  wattmeter  readings  showed  that  during  the  last  four  weeks 
of  the  nine-hour  system,  the  average  amount  of  power  transmitted 
per  hour  was  49 . 2  kilowatts.  By  a  special  contrivance  it  was  shown 
that  during  this  time,  the  hourly  "waste  of  power"  (the  plant  "run- 
ning dead")  was  about  half  the  total  use,  that  is,  26  k.  w.  Thus  the 
actual  amoimt  of  power  used  averaged  23 . 2  k.  w.  per  hour.  After 
the  eight-hour  day  was  introduced  the  amount  of  power  transmitted 
rose  from  49.2  k.  w.  to  52  k.  w.  per  hour.  The  actual  amount  used 
rose  from  23.2  k,  w,  to  26.0  k.w.  per  hour;  that  is,  in  the  ratio  of 
100:112.  This  shows  that  eight  hours'  work  just  equalled  the 
previous  nine  hours'  work,  since,  as  we  have  seen  before,  for  our 
mathematical  basis,  8:9=110:112.5. 

But  in  effect,  in  many  of  the  operations,  the  output  not  only 
equalled  but  exceeded  that  of  the  previous  nine-hour  regime;  and 
the  wattmeter  readings  proved  this  also.  For  the  majority  of  the 
machines  in  the  works  (three-fourths  of  them)  were  not  wholly 
automatic.  They  were  machines  which  the  workers  used  like  tools, 
using  more  or  less  power  according  to  their  intensity  of  application, 
by  shortening  pauses  between  operations,  pressing  more  or  less  heavily 
in  grinding  and  polishing,  and  in  similar  ways. 

Hence  the  increased  amount  of  power  used  in  the  eight-hour 
day,  as  shown  by  the  hourly  readings,  was  to  be  ascribed  not  to  all 
the  machines,  but  to  three-quarters  of  the  machines  only.  The 
ratio  of  increase  for  these,  where  the  men  regulated  the  amount  of 
power  used,  was  larger  than  the  given  figure  of  100 : 1 1 2  which  included 
all  the  machines.  For  three-quarters  of  the  machines,  the  ratio  of 
increase  was  higher;  that  is,  as  100:116.  In  other  words,  they 
exceeded  in  eight  hours  by  3  per  cent  the  output  of  the  nine-hour 


720  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

day,  confirming  the  conclusion  previously  proved  by  the  earnings 
of  the  piece-workers. 

Such  being  the  evidence  of  cold  statistics,  the  man  of  science  in 
Abbe  began  to  search  for  the  causes.  He  examined  the  external 
conditions  of  work  during  the  trial  year  and  the  year  before.  They 
had  not  markedly  varied.  The  demand  for  Zeiss  products  and  the 
consequent  pressure  at  the  works  had  been  the  same.  There  had  been 
no  extremes  of  heat  or  cold  in  the  seasons,  which,  as  he  found,  some- 
times afifect  the  output  of  highly  skilled  mechanics.  In  fact,  the 
workers  had  for  the  most  part  been  unconscious  of  their  increased 
intensity  of  work.  Many  would  not  believe  that  they  had  produced 
more  in  eight  hours  than  in  nine  until  shown  the  proof.  The  figures 
showing  the  weekly  amount  of  power  used  confirmed  what  Abbe 
learned  direct  from  the  men.  Some  had  begun  to  work  with  feverish 
intensity  when  the  new  day  was  introduced,  but  had  given  it  up  in 
disgust  after  the  first  week,  finding  the  effort  exhausting.  During 
the  second  week  the  output  of  these  workers  had  consequently 
fallen  below  the  nine-hour  day;  but  by  the  third  or  fourth  week 
they  had  recovered  their  normal  pace,  and,  unknown  to  themselves, 
were  equalling  and  surpassing  the  work  of  the  longer  day. 

Abbe  concluded  that  the  adaptation  of  the  worker  to  the  shorter 
day,  his  intensity  of  application,  was  largely  automatic,  and  did  not 
depend  primarily  on  his  good  or  ill  will.  This  was  proved  also  by  the 
firm's  previous  experience  with  overtime.  Under  the  nine-hour 
regime,  the  men  had  been  required  to  work  one  hour  overtime  at 
seasons  of  pressure.  But  it  had  been  found  that  their  efiiciency  did 
not  keep  up  for  any  length  of  time.  It  fell  off  in  about  two  weeks, 
in  spite  of  the  men's  evident  desire  to  earn  the  25  per  cent  higher 
wages  of  overtime.  One  November  Abbe  himself  had  tried  the  experi- 
ment, when  the  men  were  eager  to  earn  more  just  before  Christmas. 
But  the  result  was  the  same.  The  output  of  overtime  deteriorated 
in  one  week,  and  by  the  third  or  fourth  week  it  was  practically  nil. 

Just  where  each  man's  maximum  lies,  when  he  can  accomplish 
most  in  the  shortest  time  without  injury  to  himself.  Abbe  thought 
essentially  a  matter  of  special  investigation.  But  he  concluded,  from 
his  own  extended  observations  and  from  the  experience  of  others  in 
Germany  and  England,  that  for  about  three-fourths  of  the  industrial 
workers  of  Germany  nine  hours  was  too  long  a  day  in  which  to  reach 
their  maximum  and  eight  hours  not  too  short  to  reach  it.  He  there- 
fpre  recommended  a  program  still  commonly  held  radical — the  gradual 


LABOR  PROBLEMS  721 

reduction  of  the  workday  not  to  nine  but  to  eight  hours  for  German 
industries,  in  the  interests  of  economic  development  and  of  greater 
national  efficiency. 

210.    THE  SWEATING  SYSTEM' 

In  contrast  with  the  growth  of  large  establishments,  which  is  so 
conspicuous  a  feature  of  recent  economic  development,  it  must  be 
observed  that  in  certain  industries  the  small  shop  retains  its  hold. 
One  phase  of  this  remarkable  exception  to  the  general  trend  of  indus- 
trial organization  is  foimd  in  the  so-called  sweating  system  in  the 
manufacture  of  clothing,  where,  in  certain  divisions  of  the  trade,  the 
larger  establishments  have  been  driven  out  of  business  by  smaller 
establishments.  This  supremacy  of  the  smaller  establishments  is 
closely  connected  with  the  fact  that  in  them  are  found  the  worst 
conditions  of  labor — low  wages,  long  hours,  and  oppressive  methods 
of  pajonent. 

The  sweating  system  in  the  clothing  trade,  from  the  standpoint 
of  organization  of  industry,  consists  in  the  separation  of  the  manu- 
facturing from  the  marketing  of  the  product.  The  wholesale  clothing 
manufacturer  is  really  a  wholesale  merchant,  and  the  manufacturing 
proper  is  conducted  by  independent  contractors  in  their  own  small 
establishments.  While  in  certain  lines  of  clothing  there  is  a  tendency 
toward  the  growth  of  large  merchandising,  owing  to  the  greater 
economies  in  managing  and  sustaining  a  staff  of  salesmen  and  in  the 
larger  purchases  of  cloth,  yet  on  the  manufacturer's  side  there  is  an 
advantage  in  the  small  establishment.  One  reason  why  the  small 
establishment  survives  is  the  wide  variety  of  garments  manufactured. 
Ready-made  clothing  is  now  produced  in  factories  for  men,  women, 
and  children,  of  all  styles  and  grades.  Hence  there  is  an  economy 
if  each  establishment  specializes  on  certain  lines;  and  it  is  usually 
the  case  that  one  contractor  devotes  his  entire  attention  to  a  certain 
grade  of  coats,  another  to  a  certain  grade  of  vests,  and  so  on.  The 
facts,  too,  that  the  business  depends  on  the  season,  that  the  capital 
invested  must  lie  idle  during  several  months  of  the  year,  and  that 
the  factory  must  usually  be  located  in  a  large  city,  where  rents  are 
very  high,  make  it  to  the  advantage  of  the  merchant  to  throw  the 
expenses  of  these  items  upon  the  contractor.     Such  articles  as  overalls, 

'  From  the  FituU  Report  (Vol.  XIX)  of  the  Industrial  Commission  (1902), 
pp.  740-42. 


722  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

army  clothing,  and  cheaper  garments  can  be  made  on  a  large  scale  in 
successful  competition  with  the  smaller  shops,  but  the  smaller  shops 
hold  their  own  in  the  greater  portion  of  clothing  manufacture. 

The  principal  reason,  however,  for  the  existence  of  the  small 
shop  is  the  oversupply  of  cheap  labor,  brought  about  through  immi- 
gration, and  the  pressure  of  this  class  of  laborers  to  find  employment 
under  whatever  conditions  may  be  imposed.  This  class  of  labor  can 
best  be  secured  through  the  personal  interest  of  a  contractor  rather 
than  that  of  a  foreman.  The  contractor  lives  in  the  neighborhood 
of  the  immigrants,  is  familiar  with  their  languages,  and  is  able  to 
secure  them  in  times  of  business  activity.  His  solicitations  are  more 
personal  than  those  of  large  employers. 

On  account  of  these  conditions,  the  manufacturers,  instead  of 
employing  foremen  to  supervise  the  manufacture  of  their  garments, 
give  their  work  out  to  contractors.  The  contractors,  requiring  but 
little  capital,  spring  up  in  large  numbers,  and  their  competition  with 
one  another  drives  the  contract  price  to  the  lowest  possible  limit. 
Being  on  intimate  terms  with  their  employees,  and  in  many  cases 
even  less  prosperous  than  the  better  grade  of  workmen,  they  act  as 
go-betweens,  and  when  the  merchant's  price  for  a  garment  is  lowered, 
they  can  persuade  their  workmen  to  take  a  reduction  in  pay  or  to 
agree  to  work  longer  hours.  In  this  way  a  continual  higgling  is  con- 
ducted; and  since  in  the  absence  of  strong  labor  organization  no 
established  scale  of  wages  and  no  regular  hours  of  labor  exist,  there 
is  no  protection  for  the  contractor  or  the  sweat-shop  worker. 

Originally  the  sweating  system  was  a  system  of  working  at  home, 
whither  the  tailor  with  his  family  and  a  few  helpers  carried  the  goods 
which  they  were  to  prepare  for  the  merchant.  The  homework  or 
tenement-house  work  of  former  years  has  largely  disappeared,  espe- 
cially for  the  manufacture  of  ready-made  garments,  owing  particularly 
to  legislation  directed  against  it  in  the  years  following  the  influx  of 
immigrants  fifteen  years  and  more  ago.  At  the  same  time,  also,  the 
progress  of  the  industry  has  demonstrated  the  greater  economy  of 
separate  shops,  where  a  larger  number  can  be  employed  upon  the 
same  garment,  with  a  more  minute  division  of  labor.  These  small 
shops  have  taken  the  place  of  the  tenements  in  the  manufacture  of 
the  bulk  of  ready-made  clothing.  Many  of  them  are  in  the  rear  of 
tenements  and  sometimes  in  portions  of  tenements,  though  not  in 
the  living  rooms.  There  is,  however,  one  remnant  of  the  original 
homework  which  still  largely  clings  to  the  tenement,  namely,  the 


LABOR  PROBLEMS  723 

so-called  "finishing"  on  coats  and  trousers,  and  also  certain  kinds 
of  light  work  by  which  the  women  of  the  house  earn  "pin  money." 
While  the  greater  portion  of  the  work  on  ready-made  clothing  has 
been  taken  out  of  the  tenement  house,  yet,  since  the  "finishing"  of 
the  garments  is  still  largely  done  at  home,  it  is  evident  that,  as  far 
as  contagious  and  infectious  diseases  are  concerned,  tenement-house 
work  is  fully  as  dangerous  to  the  public  as  it  was  in  earlier  days. 

211.    THE  ECONOMIC  THEORY  OF  A  LEGAL  MINIMUM 

WAGE' 

We  must  first  get  clearly  before  us  the  distinction  between  the 
fixing  and  enforcing  of  a  Minimum,  and  the  fixing  and  enforcing  of  a 
wage.  What  is  here  in  question  (as  in  all  factory  legislation)  is  a 
Minimum,  not  a  Maximum — still  less  any  actual  decision  that  the 
wage  shall  be  such  or  such  sum.  There  is  no  sort  of  resemblance  or 
analogy  between  prescribing  that  the  work-people  shall  under  no 
circumstances  get  more  than  a  specified  rate,  and  merely  enacting  that 
they  shall  under  no  circumstances  get  less.  The  whole  economic  and 
social  consequences  and  results  of  the  two  types  of  legislation,  and 
their  effects  on  employers  and  on  industry,  are  as  different  as  chalk 
is  from  cheese. 

The  principal  question  for  the  economist  to  consider  is  how  the 
adoption  and  enforcement  of  a  definite  minimum  of  wages  in  particular 
trades  is  likely  to  affect,  both  immediately  and  in  the  long  run,  the 
productivity  of  those  trades,  and  of  the  nation's  industry  as  a  whole. 

Now  upon  this  point  the  verdict  of  economic  theory,  whatever 
it  may  be  w6rth,  is,  I  submit,  emphatic  and  clear.  To  the  modern 
economist  there  seems  nothing  in  the  device  of  a  legal  minimum  of 
wages,  especially  where  (as  would  in  the  great  majority  of  trades  be  the 
case)  it  takes  the  form  of  a  Standard  Piecework  List,  that  is  in  any 
way  calculated  to  diminish  productivity.  On  the  contrary,  all  expe- 
rience, as  well  as  all  theory,  seems  to  show  that,  as  compared  with  no 
regulation  of  wages,  or  with  leaving  the  employer  free  to  deal  indi- 
vidually with  each  operative,  it  must  tend  actually  to  increase  the 
productivity  of  the  industry.  Every  employer  naturally  prefers  to  be 
free  to  do  whatever  he  chooses;  to  compete  in  any  way  he  pleases,  on 

» Adapted  from  Sidney  Webb,  "The  Economic  Theory  of  a  Legal  Minimum 
Wage,"  in  The  Journal  of  Political  Economy,  XX,  976-96  (December,  191 2). 

[For  estimates  of  the  reasonable  minimum  of  living  expenses  see  Selection  9, 
on  "A  Normal  Standard  of  Living." — Editors.] 


724  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  downward  way  as  well  as  on  the  upward  way.  But  the  enforce- 
ment in  any  industry,  whether  by  law  or  by  public  opinion,  or  by 
strong  Trade  Unionism,  of  a  Standard  Rate,  a  Normal  Day  and  pre- 
scribed conditions  of  sanitation  and  safety,  does  not  prevent  the 
employer's  choice  of  one  man  rather  than  another,  or  forbid  him  to 
pick,  out  of  the  crowd  of  applicants,  the  strongest,  the  most  skilful, 
or  the  best  conducted  workman.  The  universal  enforcement  of  a 
Legal  Minimum  Wage  in  no  way  abolishes  competition  for  employ- 
ment. It  does  not  even  limit  the  intensity  of  such  competition,  or 
the  freedom  of  the  employer  to  take  advantage  of  it.  All  that  it 
does  is  to  transfer  the  pressure  from  one  element  in  the  bargain  to  the 
other — from  the  wage  to  the  work,  from  price  to  quality.  If  the  con- 
ditions of  employment  are  unregulated,  it  will  frequently  "pay"  an 
employer  (though  it  does  not  pay  the  community  for  him  to  do  so) 
not  to  select  the  best  workman,  but  to  give  the  preference  to  an  incompe- 
tent or  infirm  man,  a  "boozer"  or  a  person  of  bad  character,  provided 
that  he  can  hire  him  at  a  sufficiently  low  wage,  make  him  work  exces- 
sive and  irregular  hours,  or  subject  him  to  insanitary  or  dangerous 
conditions.  In  short,  the  employer  may  (in  the  absence  of  definitely 
fixed  minimum  conditions)  make  more  profit,  though  less  product, 
out  of  inefficient  workmen  than  out  of  good  workmen.  With  a 
Legal  Minimum  Wage,  and  with  similarly  fixed  hours  and  sanitary 
conditions,  this  frequent  lowering  of  productivity  is  prevented.  If 
the  employer  cannot  go  below  a  common  minimum  rate,  and  is  unable 
to  grade  the  other  conditions  of  employment  down  to  the  level  of  the 
lowest  and  most  necessitous  wage  earner  in  his  establishment,  he  is 
economically  impelled  to  do  his  utmost  to  raise  the  level  of  efficiency 
of  his  workers,  so  as  to  get  the  best  possible  return  for  the  fixed  con- 
ditions. Thus,  a  Legal  Minimum  Wage  positively  increases  the  pro- 
ductivity of  the  nation's  industry,  by  insuring  that  the  surplus  of  un- 
employed workmen  shall  be  exclusively  the  least  efficient  workmen; 
or  to  put  it  in  another  way,  by  insuring  that  all  the  situations  shall 
be  filled  by  the  most  efficient  operatives  who  are  available.  This 
is  plainly  not  the  case  under  "free  competition"  where  there  is  no 
fixed  minimum. 

But  the  enforcement  of  a  Legal  Minimum  Wage  does  more  than 
act  as  a  perpetual  stimulus  to  the  selection  of  the  fittest  men  for 
employment.  The  fact  that  the  employer's  mind — no  longer  able 
to  seek  profit  by  "nibbling"  at  wages — is  constantly  intent  on  getting 
the  best  possible  workmen,  silently  and  imperceptibly  reacts  on  the 


LABOR  PROBLEMS  725 

wage  earners.  The  young  workman,  knowing  that  he  cannot  secure 
a  preference  for  employment  by  offering  to  put  up  with  worse  condi- 
tions than  the  standard,  seeks  to  commend  himself  by  a  good  character, 
technical  skill,  and  general  intelligence.  Under  a  Legal  Minimum 
Wage  there  is  secured  what  under  perfectly  free  competition  is  not 
secured,  not  only  a  constant  selection  of  the  most  efficient  but  also  a 
positive  stimulus  to  the  whole  class  to  become  more  and  more  efficient. 
It  is  unnecessary  here  to  dwell  on  the  enormous  moral  advantage  of 
such  a  permanently  acting,  all-pervasive  influence  on  character.  But 
this,  too,  has  an  economic  value  in  increasing  productivity. 

So  far  we  have  considered  merely  the  effect  upon  productivity 
of  enforcing  a  Minimum  Wage,  quite  irrespective  of  this  involving  a 
positive  increase  of  wages.  But  to  enforce  a  minimum  is  actually  to 
raise  the  wages  of,  at  any  rate,  some  of  the  worst  paid  operatives. 
We  have,  therefore,  to  consider  also  the  effect  on  the  living  human 
being  of  the  more  adequate  wages  that  the  enforcement  of  a  legal 
minimum  would  involve  in  the  lowest  grades.  If  unrestricted  indi- 
vidual competition  among  the  wage  earners  resulted  in  the  universal 
prevalence  of  a  high  standard  of  physical  and  mental  acti\dty,  it  would 
be  difficult  to  argue  that  a  mere  improvement  of  sanitation,  a  mere 
shortening  of  the  hours  of  labor,  or  a  mere  increase  in  the  amount  of 
food  and  clothing  obtained  by  the  workers  or  their  families,  would 
of  itself  increase  their  industrial  efficiency.  But  such  ideal  conditions 
are  far  from  prevailing  in  any  country.  In  the  United  Kingdom  at 
least  eight  millions  of  the  population — over  one  million  of  them,  as  Mr. 
Charles  Booth  tells  us,  in  London  alone — are  at  the  present  time 
existing  under  conditions  represented  by  family  earnings  of  less  than 
five  dollars  a  week.  It  is  notorious  that  even  in  the  United  States 
there  are  millions  of  families  unable  to  earn  regularly  throughout  the 
whole  year  as  much  as  ten  dollars  a  week,  a  sum  which  does  not 
afford,  at  present  prices,  in  the  slums  of  New  York  or  Chicago,  Pitts- 
burgh or  Cincinnati,  enough  for  a  physiologically  healthy  exist- 
ence. The  unskilled,  and  especially  the  casually  hired  laborer,  who 
is  inadequately  fed,  whose  clothing  is  scanty  and  inappropriate  to 
the  season,  who  lives  with  his  wife  and  children  in  a  single  room  in  a 
slum  tenement,  and  whose  spirit  is  broken  by  the  ever-recurring 
irregularity  of  employment,  cannot  by  any  incentive  be  stimulated 
to  much  greater  intensity  of  effort,  for  the  simple  reason  that  his 
method  of  life  makes  him  incapable  of  either  the  physical  or  mental 
energy  that  would  be  involved. 


726  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

But  we  have  got  into  the  habit  of  thinking  that  the  productivity 
of  industry  depends  more  upon  the  efficiency  of  the  brains  and  ma- 
chinery employed,  than  upon  the  quality  of  the  manual  laborers.  Let 
us,  therefore,  consider  the  probable  effects  of  a  Legal  Minimum  Wage 
upon  the  brain-workers,  including  under  this  term  all  who  are  con- 
cerned in  the  direction  of  industry.  Here  the  actual  experience  of  the 
Factory  Acts  and  of  strong  Trade  Unionism  is  very  instructive. 
When  all  the  employers  in  a  trade  find  themselves  precluded,  by  the 
existence  of  a  Common  Rule,  from  worsening  the  conditions  of 
employment — when,  for  instance,  they  are  legally  prohibited  from 
crowding  more  operatives  into  their  mills  or  keeping  them  at  work  for 
longer  hours,  or,  when  they  find  it  impossible,  owing  to  a  strictly 
enforced  piecework  list,  to  nibble  at  wages — they  are  driven  in  their 
competitive  struggle  with  each  other,  to  seek  advantage  in  other 
ways.  We  arrive,  therefore,  at  the  unexpected  result  that  the 
enforcement  of  definite  minimum  conditions  of  employment  as  com- 
pared with  a  state  of  absolute  freedom  to  the  employer  to  do  as  he 
likes,  positively  stimulates  the  invention  and  adoption  of  new  processes 
of  manufacture. 

But  this  is  not  all.  Besides  its  direct  effect  in  stimulating  all  the 
employers,  the  mere  existence  of  a  Legal  Minimum  Wage  has  another 
and  an  even  more  important  result  on  the  efficiency  of  industry,  in 
that  it  tends  steadily  to  drive  business  into  those  establishments  which 
are  most  favorably  situated,  best  equipped,  and  managed  with  the 
greatest  ability,  and  to  eliminate  the  incompetent  or  old-fashioned 
employer.  The  result  is  a  constant  tendency  for  the  whole  industry 
to  be  carried  on  under  the  most  advantageous  conditions.  This,  of 
course,  from  the  standpoint  of  the  economist  concerned  for  the  utmost 
possible  productivity,  is  all  to  the  good. 

Thus,  the  probable  effect  of  a  Legal  Minimum  Wage  on  the 
organization  of  industry,  like  its  effect  on  the  manual  laborer  and  the 
brain-working  manager  or  entrepreneur,  is  all  in  the  direction  of  in- 
creasing efficiency.  Its  effect  on  the  personal  character  of  the  opera- 
tive is  in  the  right  direction.  It  in  no  way  abolishes  competition, 
or  lessens  its  intensity.  What  it  does  is  perpetually  to  stimulate  the 
selection,  for  the  nation's  business,  of  the  most  efficient  workmen,  the 
best-equipped  employers,  and  the  most  advantageous  forms  of 
industry.  It  in  no  way  deteriorates  any  of  the  factors  of  production; 
on  the  contrary,  its  influence  acts  as  a  constant  incentive  to  the 
further  improvement  of  the  manual  laborers,  the  machinery,  and  the 


LABOR  PROBLEMS 


727 


organizing  ability  used  in  industry.  In  short,  whether  with  regard 
to  labor  or  capital,  invention  or  organizing  ability,  the  mere  existence 
of  a  Legal  Minimum  Wage  in  any  industry  promotes  alike  the  selec- 
tion of  the  most  efficient  factors  of  production,  their  progressive 
functional  adaptation  to  a  higher  level,  and  their  combination  in  the 
most  advanced  type  of  industrial  organization. 

What  would  be  the  result  of  a  Legal  Minimum  Wage  on  the 
employer's  persistent  desire  to  use  boy  labor,  girl  labor,  married 
women's  labor,  the  labor  of  old  men,  of  the  feeble-minded,  of  the 
decrepit  and  broken-down  invalids,  and  all  the  other  alternatives  to 
the  engagement  of  competent  male  adult  workers  at  a  full  Standard 
Rate  ?  What  would  be  the  effect,  in  short,  upon  the  present  employ- 
ment, at  wages  far  below  a  decent  level,  of  workers  who  at  present 
cannot  (or  at  any  rate  do  not)  obtain  a  full  subsistence  wage  ? 

To  put  it  shortly,  all  such  labor  is  parasitic  on  other  classes  of  the 
community,  and  is  at  present  employed  in  this  way  only  because  it  is 
parasitic. 

When  an  employer,  without  imparting  any  adequate  instruction 
in  a  skilled  craft,  gets  his  work  done  by  boys  and  girls  who  live  with 
their  parents  and  work  practically  for  pocket  money,  he  is  clearly 
receiving  a  subsidy  or  bounty,  which  gives  his  process  an  economic 
advantage  over  those  worked  by  fully  paid  labor.  But  this  is  not  all. 
Even  if  he  pays  the  boys  or  girls  a  wage  sufficient  to  cover  the  cost 
of  their  food,  clothing,  and  lodging  so  long  as  they  are  in  their  teens, 
and  dismisses  them  as  soon  as  they  become  adults,  he  is  in  the  same 
case.  For  the  cost  of  boys  and  girls  to  the  community  includes  not 
only  their  daily  bread  between  thirteen  and  twenty-one,  but  also 
their  nurture  from  birth  to  the  age  of  beginning  work,  and  their 
maintenance  as  adult  citizens  and  parents.  If  a  trade  is  carried  on 
entirely  by  the  labor  of  boys  and  girls,  and  is  supplied  with  successive 
relays  who  are  dismissed  as  soon  as  they  become  adults,  the  mere 
fact  that  the  employers  pay  what  seems  a  subsistence  wage  to  the 
young  people  does  not  prevent  the  trade  from  being  economically 
parasitic.  The  employer  of  adult  women  is  in  the  same  case,  where, 
as  is  usual,  he  pays  them  a  wage  insufficient  to  keep  them  in  full 
efficiency,  irrespective  of  what  they  receive  from  their  parents,  hus- 
bands, or  lovers.  In  all  these  instances  the  efficiency  of  the  services 
rendered  by  young  persons  or  women  is  being  kept  up  out  of  the 
earnings  of  some  other  class.  These  trades  are  therefore  as  clearly 
receiving  a  subsidy  as  if  the  workers  in  them  were  being  given  a 


728  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

"rate  in  aid  of  wages."  The  employer  of  partially  subsidized 
woman  or  child  labor  gains  actually  a  double  advantage  over  the 
self-supporting  trades:  he  gets,  without  cost  to  himself,  the  extra 
energy  due  to  the  extra  food  for  which  his  wages  do  not  pay,  and  he 
abstracts — possibly  from  the  workers  at  a  rival  process,  or  in  a  com- 
peting industry — some  of  the  income  which  might  have  increased  the 
energy  put  into  the  other  trade. 

But  there  is  a  far  more  vicious  form  of  parasitism  than  this  partial 
maintenance  by  another  class.  The  continued  efficiency  of  a  nation's 
industry  obviously  depends  on  the  continuance  of  its  citizens  in 
health  and  strength.  For  an  industry  to  be  economically  self-support- 
ing, it  must,  therefore,  maintain  its  full  establishment  of  workers, 
unimpaired  in  numbers  and  vigor,  with  a  sufficient  number  of  children 
to  fill  all  vacancies  caused  by  death  or  superannuation.  If  the 
employers  in  a  particular  trade  are  able  to  take  such  advantage  of 
the  necessities  of  their  workpeople  as  to  hire  them  for  wages  actually 
insufficient  to  provide  enough  food,  clothing,  and  shelter  to  maintain 
them  permanently  in  average  health;  if  they  are  able  to  work  them 
for  hours  so  long  as  to  deprive  them  of  adequate  rest  and  recreation ; 
or  if  they  can  subject  them  to  conditions  so  dangerous  or  insanitary 
as  positively  to  shorten  their  lives,  that  trade  is  clearly  obtaining  a 
supply  of  labor  force  which  it  does  not  pay  for.  If  the  workers  thus 
used  up  were  horses — as,  for  instance,  on  the  horse-cars  of  an  old 
street  railroad,  or  like  those  that  the  English  stagecoaches  formerly 
"used  up"  in  three  years'  galloping — the  employers  would  have  to 
provide,  in  addition  to  the  daily  modicum  of  food,  shelter,  and  rest, 
the  whole  cost  of  breeding  and  training  the  successive  relays  necessary 
to  keep  up  their  establishments.  In  the  case  of  free  human  beings, 
who  are  not  purchased  by  the  employer,  this  capital  value  of  the  new 
generation  of  workers  is  placed  gratuitously  at  his  disposal,  on  pay- 
ment merely  of  subsistence  from  day  to  day.  Such  parasitic  trades 
are  not  drawing  any  money  subsidy  from  the  incomes  of  other  classes. 
But  in  thus  deteriorating  the  physique,  intelligence,  and  character  of 
their  operatives,  they  are  drawing  on  the  capital  stock  of  the  nation. 
And  even  if  the  using  up  is  not  actually  so  rapid  as  to  prevent  the 
"sweated"  workers  from  producing  a  new  generation  to  replace  them, 
the  trade  is  none  the  less  parasitic.  In  persistently  deteriorating  the 
stock  it  employs,  it  is  subtly  draining  away  the  vital  energy  of  the 
community.  It  is  taking  from  these  workers,  week  by  week,  more 
than  its  wages  can  restore  to  them.    A  whole  commimity  might  con- 


LABOR  PROBLEMS  729 

ceivably  thus  become  parasitic  on  itself,  or,  rather  upon  its  future. 
If  we  imagine  all  the  employers  in  all  the  industries  of  the  nation  to  be, 
in  this  sense,  "sweating"  their  labor,  the  entire  nation  would,  genera- 
tion by  generation,  steadily  degrade  in  character  and  industrial 
efficiency. 

It  is  to  prevent  this  result  that  every  civilized  nation  has  been 
driven,  by  a  whole  century  of  experiment,  to  the  adoption  of  stringent 
factory  legislation  as  regards  sanitation  and  hours  of  labor.  But 
just  as  it  is  against  public  policy  to  allow  an  employer  to  engage  a 
woman  to  work  excessive  hours  or  under  insanitary  conditions,  so  it 
is  equally  against  public  policy  to  permit  him  to  engage  her  for  wages 
insufficient  to  provide  the  food  and  shelter  without  which  she  cannot 
continue  in  health.  Once  we  begin  to  prescribe  the  minimum  con- 
ditions under  which  an  employer  should  be  permitted  to  open  a  fac- 
tory, there  is  no  logical  distinction  to  be  drawn  between  the  several 
clauses  of  the  wage-contract.  From  the  point  of  view  of  the  employer, 
one  way  of  increasing  his  expenses  is  the  same  as  another,  while  to  the 
economist  and  the  statesman,  concerned  with  the  permanent  efficiency 
of  industry  and  the  maintenance  of  national  health,  adequate  food 
is  at  least  as  important  as  reasonable  hours  or  good  drainage.  To 
be  completely  effectual  the  same  policy  will,  therefore,  have  to  be 
applied  to  wages.  Thus,  to  the  economist,  the  enforcement  of  a 
Legal  Minimum  Wage  appears  but  as  the  latest  of  the  long  series  of 
Common  Rules,  which  experience  has  proved  to  be  (a)  necessary 
to  prevent  national  degradation;  and  (b)  positively  advantageous  to 
industrial  efficiency. 

Does  this  mean  that  the  enforcement  of  a  Legal  Minimum  Wage 
in  any  sweated  industry  will  involve  the  destruction  of  that  industry  ? 
By  no  means. 

When  any  particular  way  of  carrying  on  an  industry  is  favored 
by  a  bounty  or  subsidy,  this  way  will  almost  certainly  be  chosen,  to 
the  exclusion  of  other  methods  of  conducting  the  business.  If  the  sub- 
sidy is  withdrawn,  it  often  happens  that  the  industry  falls  back  on 
another  process,  which,  less  immediately  profitable  to  the  capitalists 
than  the  bounty-fed  method,  proves  positively  more  advantageous 
to  the  industry  in  the  long  run.  This  result,  familiar  to  the  Free 
Trader,  is  even  more  probable  when  the  bounty  or  subsidy  takes  the 
form,  not  of  a  protective  tariff,  an  exemption  from  taxation,  or  a 
direct  money  grant,  but  of  the  privilege  of  exacting  from  the  manual 
workers  more  labor-force  than  is  replaced  by  the  wages  and  other 


730  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

conditions  of  employment.  The  low  wages  to  which,  in  the  unregu- 
lated trades,  the  stream  of  competitive  pressure  forces  employers  and 
operatives  alike,  are  not  in  themselves,  any  more  economically  ad- 
vantageous to  the  industry,  than  the  long  hours  and  the  absence  of 
sanitary  precautions  were  to  the  early  cotton  mills  of  Lancashire. 
If  the  employers  paid  more,  the  labor  would  be  worth  more.  In  so 
far  as  this  proves  to  be  the  case,  the  legal  minimum  wage  would  have 
raised  the  Standard  of  Life  without  loss  of  trade,  without  cost  to  the 
employer,  and  without  disadvantage  to  the  community. 

The  question  then  arises  what  effect  the  prohibition  of  parasitism 
would  have  on  the  individuals  at  present  working  in  the  sweated 
trades.  We  need  not  dwell  on  the  individual  personal  hardships 
incidental  to  any  shifting  of  industry  or  change  of  process.  Any 
deliberate  improvement  in  the  distribution  of  the  nation's  industry 
ought,  out  of  regard  for  these  hardships,  to  be  brought  about  gradually, 
and  with  equitable  consideration  of  the  persons  injuriously  affected. 
But  there  is  no  need  to  assume  that  anything  like  all  those  now 
receiving  less  than  the  Legal  Minimum  Wage  would  be  displaced  by 
its  enactment. 

We  see,  in  the  first  place,  that  the  very  leveling  up  of  the  standard 
conditions  of  sanitation,  hours,  and  wages  would,  in  some  directions, 
positively  increase  the  demand  for  labor.  The  contraction  of  the 
employment  of  boys  and  girls,  brought  about  by  the  needful  raising  of 
the  age  for  full  and  half-time,  respectively,  would,  in  itself,  increase 
th^  number  of  situations  to  be  filled  by  adults.  The  enforcement 
of  the  normal  day,  by  stopping  the  excessive  hours  of  labor  now  worked 
by  the  most  necessitous  operatives,  and  the  overtime  resorted  to 
whenever  it  suits  the  momentary  convenience  of  each  particular 
employer — quite  irrespective  of  whether  the  community  as  a  whole  is 
in  a  hurry  or  not — ^would  automatically  absorb  the  best  of  the 
unemployed  workers  in  their  own  and  allied  occupations,  and  would 
create  a  new  demand  for  learners.  Finally,  the  abandonment  of  that 
irregularity  of  employment  which  so  disastrously  affects  the  New  York 
outworkers  and  the  London  dock-laborers,  and  indeed  most  other 
occupations,  would  result  in  the  enrolment  of  a  new  permanent  staff. 
All  these  changes  would  bring  into  regular  work,  at  or  above  the 
Legal  Minimum,  whole  classes  of  operatives,  selected  from  among 
those  now  only  partially  or  fitfully  employed.  Thus,  all  the  most 
capable  and  best  conducted  would  certainly  obtain  regular  situations. 
But  this  concentration  of  employment  would,  it  must  be  admitted. 


LABOR  PROBLEMS  731 

imply  the  total  exclusion  of  others,  who  might,  in  the  absence  of 
regulation,  have  "picked"  up  some  sort  of  partial  livelihood.  In  so 
far  as  the  persons  thus  rendered  permanently  unemployed  consisted 
merely  of  children  removed  from  industrial  work  to  the  schoolroom, 
few  (and  certainly  no  economist)  would  doubt  that  the  change  would 
be  wholly  advantageous  to  natural  productivity  and  economic 
efficiency.  And  there  are  many  who  would  welcome  a  reorganization 
of  industry,  which,  by  concentrating  employment  exclusively  among 
those  in  regular  attendance,  would  tend  automatically  to  exclude 
from  wage-labor,  and  to  set  free  for  domestic  duties,  an  ever-increas- 
ing proportion  of  the  women  having  young  children  to  attend  to. 
There  would  still  remain  to  be  considered  the  remnant,  who,  notwith- 
standing the  increased  demand  for  adult  male  labor  and  independent 
female  labor,  proved  to  be  incapable  of  earning  the  Legal  Minimum 
in  any  capacity  whatsoever.  We  should,  in  fact,  be  brought  face  to 
face  with  the  problem,  not  of  the  unemployed  but  of  the  unemploy- 
able; those  whom  no  employer  would  employ  at  the  Legal  Minimum 
?ven  if  trade  was  booming  and  he  could  get  nobody  else. 

The  unemployable,  to  put  it  bluntly,  do  not  and  cannot  under  any 
circumstances  earn  their  keep.  What  we  have  to  do  with  them  is  to 
see  that  as  few  as  possible  of  them  are  produced;  that  such  of  them 
as  can  be  cured  are  (almost  at  whatever  cost)  treated  so  as  promptly 
to  remove  their  incapacity,  and  that  the  remnant  are  provided 
for  at  the  public  expense,  as  wisely,  humanely,  and  inexpensively 
as  possible. 

There  remains  the  question  for  the  economist  of  the  manner  in 
which  a  Legal  Minimum  Wage  can  be  best  determined  and  enforced. 
The  object  being  to  secure  the  community  against  the  evils  of  indus- 
trial parasitism,  the  minimum  wage  for  a  man  or  a  woman  respectively 
ought,  theoretically,  to  be  determined  by  practical  inquiry  as  to  the  cost 
of  the  food,  clothing,  and  shelter  physiologically  necessary,  according 
to  national  habit  and  custom,  to  prevent  bodily  and  mental  deteriora- 
tions. Such  a  minimum  would,  therefore,  be  low,  and  though  its 
establishment  would  be  welcomed  as  a  boon  by  the  unskilled  workers  in 
the  unregulated  trades,  it  would  not  at  all  correspond  with  the  con- 
ception of  a  "living  wage"  formed  by  the  cotton  operatives  or  the 
coal  miners.  Practically,  in  all  but  the  lowest  paid  trades,  chiefly 
for  women  workers,  it  must  in  practice  be  left  to  the  wage  earners 
to  settle  the  Standard  Rate  and  other  conditions  of  employment 
by  Collective  Bargaining. 


732  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

To  those  not  practically  acquainted  with  the  organization  of 
industry  and  Government  administration  in  countries  of  advanced 
development  the  idea  of  a  compulsorily  enforced  Minimum  Wage 
may  seem  impracticable.  Of  course,  there  will  still  be  people  up  and 
down  the  country  who  will  go  on  saying  that  it  is  "impossible" — while 
it  is  in  actual  operation,  not  only  in  Australia,  and  New  Zealand,  and 
the  United  Kingdom,  but  under  their  own  eyes!  As  a  matter  of 
fact,  the  authoritati\'e  settlement  of  a  minimum  wage  is  already  under- 
taken daily.  Every  municipal  authority  throughout  the  country  has 
to  decide,  under  the  criticism  of  public  opinion,  what  wage  it  will 
pay  to  its  lowest  grade  of  laborers.  It  can  hire  them  at  any  price, 
even  at  twenty-five  cents  a  day;  but  it  must  be  rare  that  any  such 
genuinely  "competitive"  wage  is  paid.  What  happens  in  practice 
is  that  the  officer  in  charge  fixes  such  a  wage  as  he  believes  he  can 
permanently  get  good  enough  work  for.  In  the  same  way,  the 
National  Government  of  the  United  Kingdom,  which  is  by  far  the 
largest  employer  of  labor  in  the  country,  does  not  take  the  cheapest 
laborers  it  can  get,  at  the  lowest  price  at  which  they  will  offer  them- 
selves, but  deliberately  settles  its  own  minimum  wage  for  each  depart- 
ment. What  is  not  so  generally  recognized  is  that  exactly  the  same 
change  is  taking  place  in  private  enterprise.  The  great  captains 
of  industry,  interested  in  the  permanent  efficiency  of  their  establish- 
ments, have  long  adopted  the  practice  of  deliberately  fixing  the 
minimum  wage  to  be  paid  to  the  lowest  class  of  unskilled  laborers, 
according  to  their  own  view  of  what  the  laborers  can  live  on,  instead 
of  letting  out  their  work  to  subcontractors,  whose  only  object  is  to 
exact  the  utmost  exertion  for  the  lowest  price.  A  railroad  never 
dreams  of  putting  its  situations  up  to  tender,  and  engaging  the  man 
who  offers  to  come  at  the  lowest  wage;  what  happens  is  that  the  rate 
of  pay  of  trainmen  and  roadmen  is  deliberately  fixed  in  advance. 
The  assumption  that  the  wages  of  the  lowest  grade  of  labor  must, 
at  any  rate,  be  enough  to  maintain  the  laborer  in  industrial  efficiency 
is,  in  fact,  accepted  by  all  parties,  so  that  the  task  of  an  arbitrator  in 
such  a  case  is  comparatively  easy.  Indeed,  the  fixing  of  a  minimum 
wage  on  physiological  grounds  is  a  less  complicated  matter,  and  one 
demanding  less  technological  knowledge,  than  the  fixing  of  a  mini- 
mum of  sanitation,  which  is  done  in  every  Factory  Law;  and  it 
interferes  far  less  with  the  day-by-day  management  of  industry  or  its 
productivity,  than  any  fixing  of  the  maximum  hours  of  labor, 
whether  of  men  or  women.     As  a  matter  of  fact,  what  would  happen 


LABOR  PROBLEMS  733 

would  be  the  adoption,  as  the  Legal  Minimum,  of  the  wage  actually 
paid  by  the  better  establishments,  which  would  be  affected  only  to  the 
extent  of  finding  their  competitors  put  on  the  same  level  as  them- 
selves. 

On  all  counts,  therefore,  the  modern  economist  must  conclude 
that  the  enforcement,  throughout  each  particular  trade,  of  a  Legal 
Minimum  of  Wages  would,  like  the  analogous  enforcement  of  Com- 
mon Rules  as  to  hours  and  sanitation  by  the  Factory  Law,  be  cal- 
culated to  have  good,  and  not  bad,  economic  results  on  the  community 
as  a  whole. 

212.    THE  MINNESOTA  MINIMUM  WAGE  LAW  OF  1913' 

AN  ACT  TO  ESTABLISH  A  MINIMUM  WAGE  COMMISSION,  AND  TO  PROVIDE 

FOR  THE  DETERMINATION  AND  ESTABLISHMENT  OF  MINIMUM 

WAGES  FOR  WOMEN  AND  MINORS 

Be  it  enacted  by  the  Legislature  of  the  State  of  Minnesota: 

Section  i.  There  is  hereby  established  a  commission  to  be 
known  as  the  minimum  wage  commission.  It  shall  consist  of  three 
persons,  one  of  whom  shall  be  the  commissioner  of  labor  who  shall 
be  the  chairman  of  the  commission,  the  governor  shall  appoint  two 
others,  one  of  whom  shall  be  an  employer  of  women,  and  the  third 
shall  be  a  woman,  who  shall  act  as  secretary  of  the  commission.  The 
first  appointment  shall  be  made  within  sixty  days  after  the  passage 
of  this  .act  for  a  term  ending  January  i,  191 5.  Beginning  with  the 
year  191 5  the  appointments  shall  be  for  two  years  from  the  first  day 
of  January  and  until  their  successors  qualify.  Any  vacancy  that  may 
occur  shall  be  filled  in  like  manner  for  the  unexpired  portion  of  the 
term. 

Sec.  2.  The  commission  may  at  its  discretion  investigate  the 
wages  paid  to  women  and  minors  in  any  occupation  in  the  state.  At 
the  request  of  not  less  than  one  hundred  persons  engaged  in  any  occu- 
pation in  which  women  and  minors  are  employed,  the  commission 
shall  forthwith  make  such  investigation  as  herein  provided. 

Sec.  3.  Every  employer  of  women  and  minors  shall  keep  a 
register  of  the  names  and  addresses  of  and  wages  paid  to  all  women 
and  minors  employed  by  him,  together  with  number  of  hours  that 
they  are  employed  per  day  or  per  week;  and  every  such  employer 
shall  on  request  permit  the  commission  or  any  of  its  members  or  agents 
to  inspect  such  register. 

*  Chap.  547,  General  Laws  of  Minnesota,  1913. 


734  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Sec.  4.  The  commission  shall  specify  times  to  hold  public  hear- 
ings at  which  employers,  employees,  or  other  interested  persons  may 
appear  and  give  testimony  as  to  wages,  profits  and  other  pertinent 
conditions  of  the  occupation  or  industry.  The  commission  or  any 
member  thereof  shall  have  power  to  subpoena  witnesses,  to  admin- 
ister oaths,  and  to  compel  the  production  of  books,  papers,  and  other 
evidence.  Witnesses  subpoenaed  by  the  commission  may  be  allowed 
such  compensation  for  travel  and  attendance  as  the  commission  may 
deem  reasonable,  to  an  amount  not  exceeding  the  usual  mileage  and 
per  diem  allowed  by  our  courts  in  civil  cases. 

Sec.  5.  If  after  investigation  of  any  occupation  the  commission 
is  of  opinion  that  the  wages  paid  to  one-sixth  or  more  of  the  women 
or  minors  employed  therein  are  less  than  living  wages,  the  commission 
shall  forthwith  proceed  to  establish  legal  minimum  rates  of  wages 
for  said  occupations,  as  hereinafter  described  and  provided. 

Sec.  6.  The  commission  shall  determine  the  minimum  wages 
sufficient  for  living  wages  for  women  and  minors  of  ordinary  ability, 
and  also  the  minimum  wages  sufficient  for  living  wages  for  learners 
and  apprentices.  The  commission  shall  then  issue  an  order,  to  be 
effective  thirty  days  thereafter,  making  the  wages  thus  determined 
the  minimum  wages  in  said  occupation  throughout  the  state,  or 
within  any  area  of  the  state  if  differences  in  the  cost  of  living  warrant 
this  restriction.  A  copy  of  said  order  shall  be  mailed,  so  far  as  practi- 
cable, to  each  employer  affected;  and  each  such  employer  shall  be 
required  to  post  such  a  reasonable  number  of  copies  as  the  commission 
may  determine  in  each  building  or  other  work  place  in  which  affected 
workers  are  employed.  The  original  order  shall  be  filed  with  the 
commissioner  of  labor. 

Sec.  7.  The  commission  may  at  its  discretion  establish  in  any 
occupation  an  advisory  board  which  shall  serve  without  pay,  consist- 
ing of  not  less  than  three  nor  more  than  ten  persons  representing  the 
employers,  and  an  equal  number  of  persons  representing  the 
workers  in  said  occupation,  and  of  one  or  more  disinterested  persons 
appointed  by  the  commission  to  represent  the  public;  but  the  number 
of  representatives  of  the  public  shall  not  exceed  the  number  of  repre- 
sentatives of  either  of  the  other  parties.  At  least  one-fifth  of  the 
membership  of  any  advisory  board  shall  be  composed  of  women, 
and  at  least  one  of  the  representatives  of  the  public  shall  be  a  woman. 
The  commission  shall  make  rules  and  regulations  governing  the 
selection  of  members  and  the  modes  of  procedure  of  the  advisory 


LABOR  PROBLEMS  735 

boards,  and  shall  exercise  exclusive  jurisdiction  over  all  questions 
arising  with  reference  to  the  validity  of  the  procedure  and  determina- 
tion of  said  boards.  Provided:  that  the  selection  of  members  repre- 
senting employers  and  employees  shall  be,  so  far  as  practicable,  through 
election  by  employers  and  employees  respectively. 

Sec.  8.  Each  advisory  board  shall  have  the  same  power  as  the 
commission  to  subpoena  witnesses,  administer  oaths  and  compel 
the  production  of  books,  papers,  and  other  evidence.  Witnesses 
subpoenaed  by  an  advisory  board  shall  be  allowed  the  same  compensa- 
tion as  when  subpoenaed  by  the  commission.  Each  advisory  board 
shall  recommend  to  the  commission  an  estimate  of  the  minimum  wages 
whether  by  time  rate  or  by  piece  rate,  sufficient  for  living  wages  for 
women  and  minors  of  ordinary  ability,  and  an  estimate  of  the  mini- 
mum wages  sufficient  for  living  wages  for  learners  and  apprentices.  A 
majority  of  the  entire  membership  of  an  advisory  board  shall  be  neces- 
sary and  sufficient  to  recommend  wage  estimates  to  the  commission. 

Sec.  9.  Upon  receipt  of  such  estimates  of  wages  from  an  advisory 
board,  the  commission  shall  review  the  same,  and  if  it  approves  them 
shall  make  them  the  minimum  wages  in  said  occupation,  as  provided 
in  section  6.  Such  wages  shall  be  regarded  as  determined  by  the 
commission  itself  and  the  order  of  the  commission  putting  them  into 
effect  shall  have  the  same  force  and  authority  as  though  the  wages 
were  determined  without  the  assistance  of  an  advisory  board. 

Sec.  10.  All  rates  of  wages  ordered  by  the  commission  shall 
remain  in  force  until  new  rates  are  determined  and  established  by  the 
commission.  At  the  request  of  approximately  one-fourth  of  the 
employers  or  employees  in  an  occupation,  the  commission  must  recon- 
sider the  rates  already  established  therein  and  may,  if  it  sees  fit,  order 
new  rates  of  minimum  wages  for  said  occupation.  The  commission 
may  likewise  reconsider  old  rates  and  order  new  minimimi  rates  on  its 
own  initiative. 

Sec.  II.  For  any  occupation  in  which  a  minimum  time  rate  of 
wages  only  has  been  ordered  the  commission  may  issue  to  a  woman 
physically  defective  a  special  license  authorizing  her  employment  at 
a  wage  less  than  the  general  minimum  ordered  in  said  occupation: 
and  the  commission  may  fix  a  special  wage  for  such  person.  Provided: 
that  the  number  of  such  persons  shall  not  exceed  one-tenth  of  the 
whole  number  of  workers  in  any  establishment. 

Sec  12.  Every  employer  in  any  occupation  is  hereby  prohibited 
from  employing  any  worker  at  less  than  the  living  wage  or  minimuTr) 


736  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

wage  as  defined  in  this  act  and  determined  in  an  order  of  the  commis- 
sion: and  it  shall  be  unlawful  for  any  employer  to  employ  any  worker 
at  less  than  said  living  or  minimum  wage. 

Sec.  13.  It  shall  likewise  be  unlawful  for  any  employer  to  dis- 
charge or  in  any  manner  discriminate  against  any  employee  because 
such  employee  has  testified,  or  is  about  to  testify,  or  because  such 
employer  believes  that  said  employee  is  about  to  testify,  in  any  investi- 
gation or  proceeding  relative  to  the  enforcement  of  this  act. 

Sec.  14.  Any  worker  who  receives  less  than  the  minimum  wage 
ordered  by  the  commission  shall  be  entitled  to  recover  in  civil  action 
the  full  amount  due  as  measured  by  said  order  of  the  commission, 
together  with  costs  and  attorney's  fees  to  be  fixed  by, the  court,  not- 
withstanding any  agreement  to  work  for  a  lesser  wage. 

Sec.  15.  The  commission  shall  enforce  the  provisions  of  this 
act,  and  determine  all  questions  arising  thereunder,  except  as  other- 
wise herein  provided. 

Sec.  16.  The  commission  shall  biennially  make  a  report  of  its 
work  to  the  governor  and  the  state  legislature,  and  such  reports  shall 
be  printed  and  distributed  as  in  the  case  of  other  executive  documents. 

Sec.  17.  The  members  of  the  commission  shall  be  reimbursed 
for  traveling  and  other  necessary  expenses  incurred  in  the  performance 
of  their  duties  on  the  commission.  The  woman  member  shall  receive 
a  salary  of  eighteen  hundred  dollars  annually  for  her  work  as  secretary. 
All  claims  of  the  commission  for  expenses  necessarily  incurred  in  the 
administration  of  this  act,  but  not  exceeding  the  annual  appropriation 
hereinafter  provided,  shall  be  presented  to  the  state  auditor  for  pay- 
ment by  warrant  upon  the  state  treasurer. 

Sec.  18.  There  is  appropriated  out  of  any  money  in  the  state, 
treasury  not  otherwise  appropriated  for  the  fiscal  year  ending  July  31, 
1914,  the  sum  of  five  thousand  dollars  ($5,000.00),  and  for  the  fiscal 
yearending  July  31, 1915,  the  sum  of  five  thousand  dollars  ($5,000.00). 

Sec.  19.  Any  employer  violating  any  of  the  provisions  of  this 
act  shall  be  deemed  guilty  of  a  misdemeanor  and  upon  conviction 
thereof  shall  be  punished  for  each  offense  by  a  fine  of  not  less  than  ten 
nor  more  than  fifty  dollars  or  by  imprisonment  for  not  less  than  ten 
nor  more  than  sixty  days. 

Sec.  20.  Throughout  this  act  the  following  words  and  phrases 
as  used  herein  shall  be  considered  to  have  the  following  meanings 
respectively,  unless  the  context  clearly  indicates  a  different  meaning 
in  the  connection  used: 


LABOR  PROBLEMS  737 

(i)  The  tenns  "living  wage"  or  "living  wages"  shall  mean  wages 
sufficient  to  maintain  the  worker  in  health  and  supply  him  with  the 
necessary  comforts  and  conditions  of  reasonable  life;  and  where  the 
words  "minimum  wage"  or  "minimum  wages"  are  used  in  this  act, 
the  same  shall  be  deemed  to  have  the  same  meaning  as  "living  wage" 
or  "living  wages." 

(2)  The  terms  "  rate  "  or  "  rates  "  shall  mean  rate  or  rates  of  wages. 

(3)  The  term  "commission"  shall  mean  the  minimum  wage  com- 
mission. 

(4)  The  term  "woman"  shall  mean  a  person  of  the  female  sex 
eighteen  years  of  age  or  over. 

(5)  The  term  "minor"  shall  mean  a  male  person  under  the  age 
of  twenty-one  years,  or  a  female  person  under  the  age  of  eighteen 
years. 

(6)  The  terms  "learner"  and  "apprentice"  may  mean  either  a 
woman  or  a  minor. 

(7)  The  terms  "worker"  or  "employee"  may  mean  a  woman,  a 
minor,  a  learner,  or  an  apprentice,  who  is  employed  for  wages. 

(8)  The  term  "occupation"  shall  mean  any  business,  industry, 
trade,  or  branch  of  a  trade  in  which  women  or  minors  are  employed. 

Sec.  20.  This  act  shall  take  effect  and  be  in  force  from  and  after 
its  passage. 

Approved  April  26,  1913. 

213.    MACHINERY  AND  THE  QUALITY  OF  LABOR' 

In  considering  the  influence  of  machinery  upon  the  quality  of 
labor — i.e.,  skill,  duration,  intensity,  intellectuahty,  etc.,  we  have  first 
to  face  two  questions — What  are  the  qualities  in  which  machinery 
surpasses  human  labor?  What  are  the  kinds  of  work  in  which 
machinery  displaces  man  ?  Now,  since  the  whole  of  industrial  work 
consists  in  moving  matter,  the  advantage  of  machinery  must  consist 
in  the  production  and  disposition  of  motive  power.  The  general 
economies  of  machinery  are — (i)  The  increased  quantity  of  motive 
force  it  can  apply  to  industry;  (2)  greater  exactitude  in  the  regular 
application  of  motive  force  (a)  in  time — the  exact  repetition  of  the 

» Adapted  from  J.  A.  Hobson,  The  Evolution  of  Modern  Capitalism,  chap,  ix 
(original  edition).    Walter  Scott  Publishing  Co. 

[On  the  relation  of  machinery  to  immigrant  labor  see  Selection  39.  See  also 
Selection  199:  "The  Attitude  of  the  Typographical  Union  Toward  Machinery." — 
Editors.] 


73^  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

same  acts  at  regulated  intervals,  or  greater  evenness  in  continuity,  (b) 
in  place — exact  repetition  of  the  same  movements  in  space.  All  the 
advantages  imputed  to  machinery  in  the  economy  of  human  time,  the 
utilization  of  waste  material,  the  display  of  concentrated  force  or  the 
delicacy  of  manipulation  are  derivable  from  these  two  general 
economies.  Hence  it  follows  that  wherever  the  efl&ciency  of  labor 
power  depends  chiefly  upon  the  output  of  muscular  force  in  motive 
power,  or  precision  in  the  regulation  of  muscular  force,  machinery  will 
tend  to  displace  human  labor.  Assuming,  therefore,  that  displaced 
labor  finds  other  employment,  it  will  be  transferred  to  work  where 
machinery  has  not  the  same  advantage  over  human  labor — that  is  to 
say,  to  work  where  the  muscular  strain  or  the  need  for  regularity  of 
movement  is  less.  At  first  sight  it  will  thus  seem  to  follow  that  every 
displacement  of  labor  by  machinery  will  bring  an  elevation  in  the 
quality  of  labor,  that  is,  will  increase  the  proportion  of  labor  in 
employments  which  tax  the  muscles  less  and  are  less  monotonous. 
This  is  in  the  main  the  conclusion  toward  which  Professor  Marshall 
inclines.* 

So  far  as  each  several  industry  is  concerned,  it  has  been  shown 
that  the  introduction  of  machinery  signifies  a  net  reduction  of  employ- 
ment, unless  the  development  of  trade  is  largely  extended  by  the  fall 
of  price  due  to  the  diminution  in  expenses  of  production.  It  cannot 
be  assumed  as  a  matter  of  course  that  the  labor  displaced  by  the 
introduction  of  automatic  folders  in  printing  will  be  employed  in  less 
automatic  work  connected  with  printing.  It  may  be  diverted  from 
muscular  monotony  in  printing  to  the  less  muscular  monotony  of 
providing  some  new  species  of  luxury,  the  demand  for  which  is  not  yet 
sufficiently  large  or  regular  to  justify  the  application  of  labor-saving 
machinery.  But  even  assuming  that  the  whole  or  a  large  part  of  the 
displaced  labor  is  engaged  in  work  which  is  proved  to  have  been  less 
muscular  or  less  automatic  by  the  fact  that  it  is  not  yet  undertaken 
by  machinery,  it  does  not  necessarily  follow  that  there  is  a  diminution 
in  the  aggregate  of  physical  energy  given  out,  or  in  the  total 
"monotony"  of  labor. 

One  direct  result  of  the  application  of  an  increased  proportion  of 
labor  power  to  the  kinds  of  work  which  are  less  "muscular"  and  less 
"automatic"  in  character  will  be  a  tendency  toward  greater  division 
of  labor  and  more  specialization  in  these  employments.  Now  the 
economic  advantages  of  increased  specialization  can  only  be  obtained 

»  Principles  of  Economics,  2d  ed.,  pp.  314,  322. 


LABOR  PROBLEMS  739 

by  increased  automatic  action.  Thus  the  routine  or  automatic 
character,  which  constituted  the  monotony  of  the  work  in  which 
machinery'  displaced  these  workers,  will  now  be  imparted  to  the 
higher  grades  of  labor  in  which  they  are  employed,  and  these  in  their 
turn  will  be  advanced  toward  a  condition  which  will  render  them  open 
to  a  new  invasion  of  machinery. 

Since  the  number  of  productive  processes  falling  under  machinery 
is  thus  continually  increased,  it  will  be  seen  that  we  are  not  entitled 
to  assume  that  every  displacement  of  labor  by  machinery  will  increase 
the  proportion  of  labor  engaged  in  lighter  and  more  interesting  forms 
of  non-mechanical  labor. 

Nor  is  it  shown  that  the  growth  of  machine-production  tends  to 
diminish  the  total  physical  strain  upon  the  worker,  though  it  greatly 
lessens  the  output  of  purely  muscular  activity.  As  regards  those 
workers  who  pass  from  ordinary  manual  work  to  the  tending  of 
machinery,  there  is  a  good  deal  of  evidence  to  show  that,  in  the  typical 
machine  industries,  their  new  work  taxes  their  physical  vigor  quite  as 
severely  as  the  old  work.  Professor  Shield  Nicholson  quotes  the 
following  striking  statement  from  the  Cotton  Factory  Times: 

It  is  quite  a  common  occurrence  to  hear  young  men  who  are  on  the  best 
side  of  thirty  years  of  age  declare  they  are  so  worked  up  with  the  long  mules, 
coarse  counts,  quick  speeds,  and  inferior  material,  that  they  are  fit  for 
nothing  at  night,  only  going  to  bed  and  taking  as  much  rest  as  circumstances 
wUl  allow.  There  are  few  people  who  will  credit  such  statements;  never- 
theless they  are  true,  and  can  be  verified  any  day  in  the  great  majority  of 
the  mills  in  the  spinning  districts. 

Schulze-Gaievemitz  shows  that  the  tendency  in  modem  cotton- 
spinning  and  weaving,  especially  in  England,  has  been  both  to  increase 
the  number  of  spindles  and  looms  which  an  operative  is  called  upon  to 
tend,  and  to  increase  the  speed  of  spinning.  "A  worker  tends  today 
more  than  twice  or  nearly  three  times  as  much  machinery  as  his 
father  did;  the  number  of  machines  in  use  has  increased  more  than 
five-fold  since  that  time,  while  the  workers  have  not  quite  doubled 
their  numbers."'  With  regard  to  speed,  "since  the  beginning  of  the 
seventies  the  speed  of  the  spinning  machines  alone  has  increased 
about  15  per  cent."' 

We  are  not,  however,  at  liberty  to  infer  from  Schulze-Gaevernitz's 
statement  regarding  the  increased  number  of  spindles  and  looms  an 
operative  tends,  that  an  intensification  of  labor  correspondent  with 

'  Der  Grossbetrieb,  p.  120.  'Ibid,  p.  117. 


740  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

this  increase  of  machinery  has  taken  place,  nor  can  the  increased 
output  per  operative  be  imputed  chiefly  to  improved  skill  or  energy 
of  the  operative.  Much  of  the  labor-saving  character  of  recent 
improvements,  especially  in  the  carding,  spinning,  and  intermediate 
processes,  has  reduced  to  an  automatic  state  work  which  formerly 
taxed  the  energy  of  the  operative,  who  has  thereby  been  enabled  to 
tend  more  machinery  and  to  quicken  the  speed  without  a  net  increase 
of  working  energy.  The  general  opinion  seems  to  be  that  in  the 
spinning  mills,  roughly  speaking,  75  per  cent  of  the  increased  output 
per  operative  may  be  imputed  to  improved  machinery,  25  per  cent  to 
increased  intensity  of  labor  in  regard  to  quantity  of  spindles  or 
"speeding  up." 

Summing  up  the  evidence,  we  are  able  to  conclude  that  the  short- 
ening of  working  hours  and  the  improvements  in  machinery  have 
been  attended  by  an  increased  effort  per  unit  of  labor  time.  In  the 
words  of  an  expert, 

the  change  to  those  actually  engaged  in  practical  work  is  to  lessen  the 
amount  of  hard  manual  work  of  one  class,  but  to  increase  their  responsi- 
bility, owing  to  being  placed  in  charge  of  more  machinery,  and  that  of  a 
more  expensive  kind;  while  the  work  of  the  more  lowly  skilled  will  be 
intensified,  owing  to  increased  production,  and  that  from  an  inferior  raw 
material.  I  mean  that  to  the  operative  the  improvements  in  machinery 
have  been  neutralized  by  the  inferior  quality  of  raw  material  used,  and  I 
think  it  is  fair  to  assume  that  their  work  has  been  intensified  at  least  in 
proportion  to  the  increase  of  spindles,  etc. 

The  direct  evidence  drawn  from  this  most  highly  evolved  machine 
industry  seems  to  justify  the  general  opinion  expressed  by  Professor 
Nicholson,  "It  is  clear  that  the  use  of  machines,  though  apparently 
labor-saving,  often  leads  to  an  increase  in  the  quantity  of  labor,  nega- 
tively, by  not  developing  the  mind,  positively,  by  doing  harm  to 
the  body.'" 

When  any  muscular  or  other  physical  effort  is  required  it  is  pretty 
evident  that  an  increased  duration  or  a  greater  continuity  in  the 
slighter  effort  may  tax  the  body  quite  as  severely  as  the  less  frequent 
or  constant  application  of  a  much  greater  bodily  force.  There  can  be 
no  question  but  that  in  a  competitive  industrial  society  there  exists  a 

■  Babbage,  in  laying  stress  on  one  of  the  "advantages"  of  machinery,  makes  an 
ingenuous  admission  of  this  "forcing"  power.  "One  of  the  most  singular  advan- 
tages we  derive  from  machinery  is  the  check  it  affords  against  the  inattention,  the 
idleness,  or  the  knavery  of  human  agents." — Economy  of  Machinery,  p.  39;  of.  also 
Ure.  Philosophy  of  Manufactures,  p.  30. 


LABOR  PROBLEMS  741 

tendency  to  compensate  for  any  saving  of  hard  muscular  or  other 
physical  effort  afforded  by  the  intervention  of  machinery  in  two  ways: 
first,  by  "forcing  the  pace" — i.e.,  compelling  the  worker  to  attend 
more  machines  or  to  work  more  rapidly,  thus  increasing  the  strain,  if 
not  upon  the  muscles,  then  upon  the  nerves;  secondly,  by  extending 
the  hours  of  labor.  A  lighter  form  of  labor  spread  over  an  increased 
period  of  time,  or  an  increased  number  of  minor  muscular  exertions 
substituted  for  a  smaller  nimiber  of  heavier  exertions  within  the  same 
period  of  time,  may  of  course  amount  to  an  increased  tax  upon  the 
vital  energy.  It  is  not  disputed  that  a  general  result  of  the  factory 
system  has  been  to  increase  the  average  length  of  the  working  day,  if 
we  take  under  our  survey  the  whole  area  of  machine-production  in 
modern  industrial  commimities.  This  is  only  in  part  attributable  to 
the  fact  that  workers  can  be  induced  to  sell  the  same  daily  output  of 
physical  energy  as  before,  while  in  many  cases  a  longer  time  is  required 
for  its  expenditure.  Another  influence  of  equal  potency  is  the 
economy  of  machinery  effected  by  working  longer  hours.  It  is  the 
combined  operation  of  these  two  forces  that  has  lengthened  the  aver- 
age working  day.  Certain  subsidiary  influences,  however,  also 
deserve  notice,  especially  the  introduction  of  cheap  illimiinants. 
Before  the  cheap  provision  of  gas,  the  working  time  was  generally 
limited  by  daylight.  Not  until  the  first  decade  of  this  century  was 
gas  introduced  into  cotton-mills,  and  another  generation  elapsed 
before  it  passed  in  general  use  in  manufactories  and  retail  shops.' 
Now  a  portion  of  nature's  rest  has  been  annexed  to  the  working  day. 
There  are,  of  course,  powerful  social  forces  making  for  a  curtailment 
of  the  working  day,  and  these  forces  are  in  many  industries  powerfully 
though  indirectly  aided  by  machinery.  Perhaps  it  would  be  right  to 
say  that  machinery  develops  two  antagonistic  tendencies  as  regards 
the  length  of  the  working  day.  Its  most  direct  economic  influence 
favors  an  extension  of  the  working  hours,  for  machinery  untired, 
wasting  power  by  idleness,  favors  continuous  work.  But  when  the 
growing  pace  and  complexity  of  highly  organized  machinery  taxes 
human  energy  with  increasing  severity,  and  compresses  an  increased 
human  effort  within  a  given  time,  a  certain  net  advantage  in  limiting 
the  working  day  for  an  individual  begins  to  emerge,  and  it  becomes 
increasingly  advantageous  to  work  the  machinery  for  shorter  hours, 
or,  where  possible,  to  apply  "  shifts  "  of  workers.* 

'  Porter,  Progress  of  the  Nation,  p.  590. 

'  Cf.  Schulze-Gaevernitz,  p.  115.  -^ 


742  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

But  in  the  present  stage  of  machine-development  the  economy  of 
the  shorter  working  day  is  only  obtainable  in  a  few  trades  and  in  a 
few  countries;  the  general  tendency  is  still  in  the  direction  of  an 
extended  working  day.  The  full  significance  of  this  is  not  confined 
to  the  fact  that  a  larger  proportion  of  the  worker's  time  is  consumed 
in  the  growing  monotony  of  production.  The  curtailment  of  his  time 
for  consumption,  and  a  consequent  lessening  of  the  subjective  value 
of  his  consumables  must  be  set  off  against  such  increase  in  real  wages 
or  purchasing  power  as  may  have  come  to  him  from  the  increased 
productive  power  of  machinery.  The  value  of  a  shorter  working  day 
consists  not  merely  in  the  diminution  of  the  burden  of  toil  it  brings, 
but  also  in  the  fact  that  increased  consumption  time  enables  the 
workers  to  get  a  fuller  use  of  his  purchased  consumables,  and  to  enjoy 
various  kinds  of  "free  wealth"  from  which  he  was  precluded  under  a 
longer  working  day.*  So  far  as  machinery  has  converted  handi- 
craftsmen into  machine-tenders,  it  is  extremely  doubtful  whether  it 
has  lessened  the  strain  upon  their  energies,  though  we  should  hesitate 
to  give  an  explicit  indorsement  to  Mill's  somewhat  rhetorical  verdict. 
"It  is  questionable  if  all  the  mechanical  inventions  yet  made  have 
lightened  the  day's  toil  of  any  human  being."  At  any  rate  we  have 
as  yet  no  security  that  machinery,  owned  by  individuals  who  do  not 
themselves  tend  it,  shall  not  be  used  in  such  a  way  as  to  increase  the 
physical  strain  of  those  who  do  tend  it. 

There  is  a  temptation  [as  Mr.  Cunningham  says]  to  treat  the  machine 
as  the  main  element  in  production,  and  to  make  it  the  measure  of  what  a 
man  ought  to  do,  instead  of  regarding  the  man  as  the  first  consideration,  and 
the  machine  as  the  instrument  which  helps  him;  the  machine  may  be  made 
the  primary  consideration,  and  the  man  may  be  treated  as  a  mere  slave 
who  tends  it.* 

Now  to  come  to  the  question  of  "  monotony."  Is  the  net  tendency 
of  machinery  to  make  labor  more  monotonous  or  less,  to  educate  the 
worker  or  to  brutalize  him  ?  Does  labor  become  more  intellectual 
under  the  machine?  Professor  Marshall,  who  has  thoughtfully 
discussed  this  question,  inclines  in  favor  of  machinery.  It  takes  away 
manual  skill,  but  it  substitutes  higher  or  more  intellectual  forms  of 
skill.'  "The  more  delicate  the  machine's  power  the  greater  is  the 
judgment  and  carefulness  which  is  called  for  from  those  who  see  after 

'  Cf.  Patten,  The  Theory  of  Dynamic  Economics,  chap.  xi. 

'  Uses  and  Abuses  of  Money,  p.  iii.  *  Principles,  p.  315. 


LABOR  PROBLEMS  743 

it."*  Since  machinery  is  daily  becoming  more  and  more  delicate,  it 
would  follow  that  the  tending  of  machinery  would  become  more  and 
more  intellectual.  The  judgment  of  Mr.  Cooke  Taylor,  in  the 
conclusion  of  his  admirable  work.  The  Modern  Factory  System,  is  the 
same.  "  If  man  were  merely  an  intellectual  animal,  even  only  a  moral 
and  intellectual  one,  it  could  scarcely  be  denied,  it  seems  to  us,  that 
the  results  of  the  factory  system  have  been  thus  far  elevating."  Mr. 
Taylor  indeed  admits  of  the  operative  population  that  "they  have 
deteriorated  artistically;  but  art  is  a  matter  of  faculty,  of  perception, 
of  aptitude,  rather  than  of  intellect."  This  strange  severance  of  art 
from  intellect  and  morals,  especially  when  we  bear  in  mind  that  life 
itself  is  the  finest  and  most  valuable  of  arts,  will  scarcely  commend 
itself  to  deeper  students  of  economic  movements. 

The  growth  of  machinery  has  acted  as  an  enormous  stimulus  to 
the  study  of  natural  laws.  A  larger  and  larger  proportion  of  human 
effort  is  absorbed  in  processes  of  invention,  in  the  manipulation  of 
commerce  on  an  increasing  scale  of  magnitude  and  complexity,  and 
in  such  management  of  machinery  and  men  as  requires  and  educates 
high  intellectual  faculties  of  observation,  judgment,  and  speculative 
imagination.  Of  that  portion  of  workers  who  may  be  said,  within 
limits,  to  control  machinery,  there  can  be  no  question  that  the  total 
effect  of  machinery  has  been  highly  educative.  The  growing  size, 
power,  speed,  complexity  of  machinery  undoubtedly  makes  the  work 
of  this  class  of  workers  "more  intellectual."  Some  measure  of  these 
educative  influences  even  extends  to  the  "hand"  who  tends  some 
minute  portion  of  the  machinery,  so  far  as  the  proper  performance  of 
his  task  requires  him  to  understand  other  processes  than  those  to 
which  his  labor  is  directly  and  exclusively  applied. 

Though  the  quaUty  and  intelligence  and  skill  applied  to  the 
invention,  application,  and  management  of  machinery  is  constantly 
increasing,  practical  authorities  are  almost  unanimous  in  admitting 
that  the  proportion  which  this  skilled  work  bears  to  the  aggregate  of 
labor  in  machine  industry  is  constantly  diminishing.  Now,  setting 
on  one  side  this  small  proportion  of  intelligent  labor,  what  are  we  to 
say  of  the  labor  of  him  who,  under  the  minute  subdivision  enforced  by 
machinery,  is  obliged  to  spend  his  working  life  in  tending  some  small 
portion  of  a  single  machine,  the  whole  result  of  which  is  continually  to 
push  some  single  commodity  a  single  step  along  the  journey  from  raw 
material  to  consumptive  goods  ? 

'/iti.,  p.  316. 


744  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  factory  is  organized  with  military  precision,  the  individual's 
work  is  definitely  fixed  for  him;  he  has  nothing  to  say  as  to  the  plan 
of  his  work  or  its  final  completion  or  its  ultimate  use.  "The  constant 
employment  on  one  sLxty-fourth  part  of  a  shoe  not  only  offers  no 
encouragement  to  mental  acti\'ity,  but  dulls  by  its  monotony  the 
brains  of  the  employee  to  such  an  extent  that  the  power  to  think  and 
reason  is  almost  lost."' 

The  work  of  a  machine-tender,  it  is  urged,  calls  for  "judgment  and 
carefulness."  So  did  his  manual  labor  before  the  machine  took  it 
over.  His  "judgment  and  carefulness"  are  now  confined  within 
narrower  limits  than  before.  The  responsibility  of  the  worker  lb 
greater,  precisely  because  his  work  is  narrowed  down  so  as  to  be  related 
to  and  dependent  on  a  number  of  other  operatives  in  other  parts  of 
the  same  machine  with  whom  he  has  no  direct  personal  concern. 
Such  realized  responsibility  is  an  element  in  education,  moral  and 
intellectual.  But  this  gain  is  the  direct  result  of  the  minute  sub- 
division, and  must  therefore  be  regarded  as  purchased  by  a  narrowing 
of  interest  and  a  growing  monotony  of  work.  The  ordinary  machine- 
tender,  save  in  a  very  few  instances,  e.g.,  watchmaking,  has  no  general 
understanding  of  the  work  of  a  whole  department.  Present  conditions 
do  not  enable  the  "tender"  to  get  out  of  machinery  the  educational 
influence  he  might  get. 

Generally  speaking  [says  Dr.  Arlidge],  it  may  be  asserted  of  machinery 
that  it  calls  for  little  or  no  brain  exertion  on  the  part  of  those  connected 
with  its  operations;  it  arouses  no  interest,  and  has  nothing  in  it  to  quicken 
or  brighten  the  intelligence,  though  it  may  sharpen  the  sight  and  stimulate 
muscular  activity  in  some  one  limited  direction.* 

The  work  of  machine-tending  is  never  of  course  absolutely 
automatic  or  without  spontaneity  and  skill.  To  a  certain  limited 
extent  the  " tender"  of  machinery  rules  as  well  as  serves  the  macliine; 
in  seeing  that  his  portion  of  the  machine  works  in  accurate  adjustment 
to  the  rest,  the  qualities  of  care,  judgment,  and  responsibility  are 
evolved.  For  a  customary  skill  of  wrist  and  eye,  which  speedily 
hardens  into  an  instinct,  is  often  substituted  a  series  of  adjustments 
requiring  accurate  quantitative  measurement  and  conscious  reference 
to  exact  standards.  In  such  industries  as  those  of  watchmaking  the 
factory  worker,  though  upon  the  average  his  work  requires  less  manual 
dexterity  than  the  handworker  in  the  older  method,  may  get  more 

'  D.  A.  Wells,  Contemporary  Review,  1889,  p.  392. 
'  Diseases  of  Occupations,  pp.  25,  62. 


LABOR  PROBLEMS  745 

intellectual  exercise  in  the  course  of  his  work.  But  though  economists 
have  paid  much  attention  to  this  industry,  in  considering  the  character 
of  machine-tending  it  is  not  an  average  example  for  a  comparison  of 
machine  labor  and  hand  labor;  for  the  extreme  delicacy  of  many  ot 
the  operations,  even  under  machinery,  the  responsibility  attaching  to 
the  manipulation  of  expensive  material,  and  the  minute  adjustment 
of  the  numerous  small  parts,  enable  the  worker  in  a  watch  factory  to 
get  more  interest  and  more  mental  training  out  of  his  work  than  falls 
to  the  ordinary  worker  in  a  textile  or  metal  factory.  Wherever  the 
material  is  of  a  very  delicate  nature  and  the  processes  involve  some 
close  study  of  the  individual  qualities  of  each  piece  of  material,  as  is 
the  case  with  the  more  valuable  metals,  with  some  forms  of  pottery, 
with  silk  or  lace,  elements  of  thought  and  skill  survive  and  may  even 
be  fostered  under  machine  industry.  A  great  part  of  modern  invent- 
iveness, however,  is  engaged  in  devising  automatic  checks  and 
indicators  for  the  sake  of  dispensing  with  detailed  human  skill  and 
reducing  the  spontaneous  or  thoughtful  elements  of  tending  machinery 
to  a  minimum.  When  this  minimum  is  reached  the  highly  paid 
skilled  workman  gives  place  to  the  low-skilled  woman  or  child,  and 
eventually  the  process  passes  over  entirely  into  the  hands  of 
machinery. 

A  locomotive  superintendent  of  a  railway  was  recently  questioned 
as  to  the  quality  of  engine-driving.  "After  twenty  years'  experience 
he  declared  emphatically  that  the  very  best  engine-drivers  were  those 
who  were  most  mechanical  and  unintelligent  in  their  work,  who  cared 
least  about  the  internal  mechanism  of  the  engine."'  Yet  engine- 
driving  is  far  less  mechanical  and  monotonous  than  ordinary  tending 
of  machinery. 

So  far  as  the  man  follows  the  machine  and  has  his  work  determined 
for  him  by  mechanical  necessity,  the  educative  pressure  of  the  latter 
force  must  be  predominant.  Machinery,  like  everything  else,  can 
only  teach  what  it  practices.  Order,  exactitude,  persistence,  con- 
formity to  unbending  law — these  are  the  lessons  which  must  emanate 
from  the  machine.  They  have  an  important  place  as  elements  in  the 
formation  of  intellectual  and  moral  character.  But  of  themselves 
they  contribute  a  one-sided  and  very  imperfect  education.  Machinery 
can  exactly  reproduce;  it  can,  therefore,  teach  the  lesson  of  exact 
reproduction,  an  education  of  quantitative  measurements.  The 
defect  of  machinery,  from  the  educative  point  of  view,  is  its  absolute 

■  The  Social  Horizon,  p.  22. 


746  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

conservatism.  The  law  of  machinery  is  a  law  of  statical  order,  that 
everything  conforms  to  a  pattern,  that  present  actions  precisely 
resemble  past  and  future  actions.  Now  the  law  of  human  life  is 
d^Tiamic,  requiring  order  not  as  valuable  in  itself,  but  as  the  condition 
of  progress.  The  law  of  human  life  is  that  no  experience,  no  thought, 
or  feeling  is  an  exact  copy  of  any  other.  Therefore,  if  you  confine  a 
man  to  expending  his  energy  in  trying  to  conform  exactly  to  the 
movements  of  a  machine,  you  teach  him  to  abrogate  the  very  principle 
of  life.  Variety  is  of  the  essence  of  life,  and  machinery  is  the  enemy 
of  variety.  This  is  no  argument  against  the  educative  uses  of 
machinery,  but  only  against  the  exaggeration  of  these  uses.  If  a 
workman  expend  a  reasonable  portion  of  his  energy  in  following  the 
movements  of  a  machine,  he  may  gain  a  considerable  educational 
value;  but  he  must  also  have  both  time  and  energy  left  to  cultivate 
the  spontaneous  and  progressive  arts  of  life. 

It  is  often  urged  that  the  tendency  of  machinery  is  not  merely  to 
render  monotonous  the  activity  of  the  individual  worker,  but  to  reduce 
the  individual  difTerences  in  workers.  This  criticism  finds  expression 
in  the  sa^ang:  "All  men  are  equal  before  the  machine."  So  far  as 
machinery  actually  shifts  upon  natural  forces  work  which  othenvise 
would  tax  the  muscular  energy,  it  undoubtedly  tends  to  put  upon  a 
level  workers  of  dijfferent  muscular  capacity.  Moreover,  by  taking 
over  work  which  requires  great  precision  of  movement,  there  is  a  sense 
in  which  it  is  true  that  machinery  tends  to  reduce  the  workers  to  a 
common  level  of  skill,  or  even  of  unskill. 

Whenever  a  process  requires  peculiar  dexterity  and  steadiness  of  hand, 
it  is  withdrawn  as  soon  as  possible  from  the  cunning  workman,  who  is  prone 
to  irregularities  of  many  kinds,  and  it  is  placed  in  charge  of  a  peculiar 
mechanism,  so  self-regulating  that  a  child  can  superintend  it.' 

That  this  is  not  true  of  the  most  highly  skilled  or  qualitative  work 
must  be  conceded,  but  it  appUes  with  great  force  to  the  bulk  of  lower 
skilled  labor. 

But  this  is  by  no  means  all  that  is  signified  by  the  "equality  of 
workers  before  the  machine."  It  is  the  adaptability  of  the  machine 
to  the  weaker  muscles  and  intelligence  of  women  and  children  that  is 
perhaps  the  most  important  factor.  The  machine  in  its  development 
tends  to  give  less  and  less  prominence  to  muscle  and  high  individual 
skill  in  the  mass  of  workers,  more  and  more  to  certain  qualities  of 

'  f  Jre,  Philosophy  of  Manufactures,  chap,  i,  p.  19. 


LABOR  PROBLEMS  747 

body  and  mind  which  not  only  differ  less  widely  in  different  men,  but 
in  which  women  and  children  are  more  nearly  on  a  level  with  men. 
The  tendency  of  machine  industry  to  displace  male  by  female  labor  is 
beyond  all  question.  Legal  restrictions,  and  in  the  more  civilized 
communities,  the  growth  of  a  healthy  public  opinion,  prevent  the 
economic  force  from  being  operative  to  the  same  degree  so  far  as 
children  are  concerned. 

The  net  influence  of  machinery  upon  the  quality  of  labor,  then,  is 
found  to  differ  widely  according  to  the  relation  which  subsists  between 
the  worker  and  the  machine.  Its  educative  influence,  intellectual 
and  moral,  upon  those  concerned  with  the  invention,  management,  and 
direction  of  machine  industry,  and  upon  all  whose  work  is  about 
machinery,  but  who  are  not  detailed  machine-tenders,  is  of  a  dis- 
tinctly elevating  character.  Its  effect,  however,  upon  machine- 
tenders  in  cases  where,  by  the  duration  of  the  working  day  or  the 
intensity  of  the  physical  effort,  it  exhausts  the  productive  energy  of 
the  worker,  is  to  depress  vitality  and  lower  him  in  the  scale  of  human- 
ity by  an  excessive  habit  of  conformity  to  the  automatic  movements 
of  a  non-human  motor.  This  human  injury  is  not  adequately 
compensated  by  the  education  in  routine  and  regularity  which  it 
confers,  or  by  the  slight  understanding  of  the  large  co-operative 
purposes  and  methods  of  machine  industry  which  his  position  enables 
him  to  acquire. 

214.    EMPLOYERS'  LIABILITY' 

I.    employers'  liability  in  the  united  states* 

a)  The  law. — The  status  of  the  law  of  employers'  liability  in 
the  United  States  will  be  discussed  briefly,  first,  in  its  relation  to  the 
common  law,  then,  in  regard  to  legislative  enactments,  and  finally 
respecting  the  practical  results  of  its  application. 

The  common-law  principles  here  involved  fall  under  three  heads — 
the  law  of  negligence,  the  doctrine  of  assumed  risks,  and  the  fellow- 
servant  doctrine. 

'Adapted  from  G.  L.  Campbell,  Industrial  Accident  Compensation,  chaps,  iv 
and  vi.    Houghton  Mifflin  Co.,  191 1. 

» No  effort  has  been  made  to  present  an  exhaustive  study  of  the  subject.  A 
very  full  statement  of  the  common-law  principles  and  judicial  interpretations, 
together  with  the  text  of  statutory  enactments  in  the  American  states,  may  be 
found  in  Bulletin  of  the  United  States  Bureau  of  Labor,  No.  74  (January,  1908). 


748  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

It  has  long  been  recognized  in  the  common  law  that  he  whose 
negligence  has  led  to  the  injury  of  a  fellow-man  may  be  held  fman- 
cially  responsible  for  damages.  This,  in  brief,  is  the  law  of  negligence. 
Linked  closely  to  it  is  the  principle  of  respondeat  superior,  which  was 
first  laid  down  in  1697  in  the  case  of  Tuberville  vs.  Statnpe.  The 
court  asserted  that  he  who  chooses  the  convenience  of  delegating  to 
others  the  performance  of  his  personal  and  business  services  is  as 
responsible  for  injuries  brought  about  in  doing  them  as  if  he  were 
himself  the  direct  agent.  In  other  words,  the  master  must  answer 
for  the  negUgence  of  the  servant.  Shortly  after  this,  in  the  case 
of  Thomas  vs.  Quarter maine,  the  principle  of  contributory  negligence 
was  enunciated.  If  the  plaintiff,  it  was  averred,  had  so  contributed 
to  the  causes  of  the  accident  that  the  breach  of  duty  on  the  part  of 
the  defendant  was  not  its  proximate  cause,  then  he,  the  plaintiff,  had 
no  ground  for  action. 

The  law  of  negligence  is  general  in  its  provisions — no  distinction 
is  made,  up  to  this  point,  between  those  who  are  servants  of  the 
negligent  party  and  those  who  are  not.  The  servant  is  the  fellow- 
man  of  the  master,  and  reasonable  precaution  against  injury  is  due 
him.  But,  in  the  last  two  maxims  of  the  common  law  relating  to 
employers'  Uability — the  doctrine  of  assumed  risks  and  the  fellow- 
servant  doctrine — important  distinctions  are  set  up  between  those 
who  are  employees  and  those  who  are  not,  and  the  accountability 
of  the  master  for  injuries  befalling  his  servants  is  limited  accordingly. 

The  doctrine  of  assumed  risk  was  the  first  of  these  maxims  to  be 
declared.  He  who  knowingly  places  himself  in  danger  of  personal 
injury  by  accepting  hazardous  employment,  assumes,  therewith, 
the  risk  of  injury.  No  one  is  in  a  better  position  to  know  the  danger- 
ous character  of  his  work,  says  this  dogma,  than  the  workman  him- 
self. He  can  therefore  demand  wages  commensurate  with  the  risk 
involved.  If,  for  any  reason,  the  danger  in  his  particular  position 
is  greater  than  might  ordinarily  be  expected,  his  legal  duty  is  to  give 
up  his  employment  or  to  obtain  a  promise  from  the  employer  to  make 
right  the  abnormal  situation.  A  free  citizen,  says  this  legal  theory, 
may  work  under  danger  or  not,  just  as  he  chooses.  If  he  chooses 
to  do  so,  then  he  has  assumed  the  risk  of  injury. 

Of  these  common-law  principles,  of  which  two  have  been  discussed, 
the  most  noteworthy,  curiously  enough,  did  not  appear  until  1837. 
In  that  year  the  fellow-servant  doctrine,  a  broad  amplification  of 
the  doctrine  of  assumed  risk,  was  laid  down  in  deciding  the  case  of 


LABOR  PROBLEMS  749 

Priestley  vs.  Fowler.  It  asserts  that  danger  of  injury  through  the 
negligence  of  another  servant  of  the  same  master  is  a  known,  common, 
and  ever-present  risk  of  working  in  company  with  others,  and  that 
consequently — in  accordance  with  the  doctrine  of  assumed  risk — a 
worker  so  injured  has  no  ground  for  action  against  his  employer. 

These  principles  of  the  common  law,  together  with  statutory 
changes  and  judicial  interpretations,  form  our  existing  law  of  employ- 
ers' Hability.  The  law  of  negligence  and  the  doctrine  of  assumed 
risk  had  already  been  transplanted  bodily  from  England  into  the 
United  States  when  our  law  entered  upon  its  independent  develop- 
ment. Although  the  fellow-servant  doctrine  was  not  enunciated  in 
England  until  long  afterward,  it  soon  found  recognition  in  American 
courts — in  the  case  of  Murray  vs.  South  Carolina  Railway  Company, 
decided  in  1841  in  South  Carolina,  and  in  Farwell  vs.  Boston  and 
Worcester  Railroad  Company,  decided  in  1842  in  Massachusetts.  In 
deciding  the  latter  case  the  court  said:  "These  are  perils  which  the 
servant  is  as  likely  to  know,  and  against  which  he  can  as  effectually 
guard,  as  the  master.  They  are  perils  incident  to  the  service,  and 
which  can  be  as  distinctly  foreseen  and  provided  for  in  the  rate  of 
compensation  as  any  others." 

In  almost  all  the  states  and  territories,  modifications  and  exten- 
sions of  these  common-law  doctrines  have  been  made  by  legislative 
enactment.  A  general  analysis  of  these  statutory  provisions  will  show 
the  wide  variation  of  the  obligations  imposed  by  employers'  liability 
laws  in  different  states. 

Statutory  changes  have  been  made  in  all  but  six  of  the  states  and 
territories,  but  in  only  sixteen  of  these  states  are  the  enactments  appli- 
cable to  all  servants.  In  twelve  others  the  laws  apply  only  to  railroad 
employees;  in  five,  to  railroad  and  mine  workers,  and  in  one  to  mine 
workers  only.  In  addition  to  these,  two  commonwealths  have 
made  laws  applicable  only  to  injuries  befalling  employees  of  corpora- 
tions; one,  laws  applicable  only  to  factory  workers;  three,  laws 
applicable  only  to  factory  and  railroad  employees;  and  another, 
laws  applicable  to  all  "industrial  employees."  In  nine  of  the  states 
having  laws  that  apply  to  all  servants,  the  particular  hazard  of  employ- 
ment on  railroads  and  in  mines  has  been  recognized  by  the  inclusion 
of  provisions  that  bear  specifically  on  cases  in  which  men  are  injured 
in  one  or  both  of  these  industries. 

In  but  nine  states  does  legislation  specifically  hold  all  employers 
responsible  for  defects  in  ways,  works,  machinery,  or  plant  that  may 


7SO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

lead  to  the  injury  of  employees.  In  five  others  such  legislation 
applies  to  railroad  companies  only.  Nineteen  states  make  provisions 
for  stated  safety  devices  and  precautions  in  factories,  on  railroads, 
and  in  mines,  and  stipulate  that  employers  be  held  responsible  for 
injuries  arising  from  non-compliance. 

In  a  majority  of  the  states  the  law,  in  so  far  as  it  is  applicable, 
makes  the  employer  specifically  liable  for  negligence  in  superintend- 
ence— that  is,  the  negligence  of  an  employee  having  powers  of  the 
master  delegated  to  him.  In  but  four  states  is  the  fellow-servant 
doctrine  abolished  for  employees  in  all  industries.  In  thirteen  it  is 
abohshed  for  railroad  employees  only,  in  three  for  both  railroad 
and  mining  employees,  and  in  one,  for  mine  workers  only.  In  ten 
states  other  than  these  the  doctrine  is  greatly  modified.  In  all, 
thirty-two  states  have  enactments  of  some  character  relating  to 
this  doctrine. 

A  means  much  used  at  one  time  to  evade  obligations  imposed  by 
employers'  liability  laws  was  to  require  workers,  as  a  condition  of 
employment,  to  sign  papers  releasing  the  employer  from  any  claims 
that  might  be  made  under  the  provision  of  such  laws.  This  is  known 
as  "contracting  out."  Twenty-one  states  expressly  provide  that, 
in  so  far  as  their  liability  laws  apply,  attempts  to  "contract  out" 
shall  be  void.  Some  of  the  states  even  attach  penalties  to  the  mere 
act  of  making  such  an  attempt.  In  four  other  states  such  contracts 
are  barred  between  railroads  and  their  employees,  and  one  state 
makes  the  same  prohibition  in  relation  to  the  mining  industry. 

b)  Objections  to  the  law. — Although  the  common  law  affecting  the 
liability  of  the  employer  for  accidents  befalling  his  men  has,  as  thus 
shown,  been  greatly  modified  by  statutory  enactments  in  many 
states,  the  judge-made  laws  concerning  negligence,  assumed  risks, 
and  the  fellow-servant  are  still  dominant.  If  the  social  and  industrial 
conditions  under  which  these  principles  were  first  promulgated  were 
not  greatly  different  from  the  conditions  under  which  productive  enter- 
prises are  conducted  at  the  present  time,  the  need  for  studying  the 
problem  of  compensation  for  accidents  would  be  less  apparent.  But 
the  tremendous  expansion  of  systems  of  production  that  has  marked 
the  development  of  modern  industrialism  has  had  two  important 
results — increased  danger  to  the  worker,  and  lessened  personal 
contact  with  fellow-workers  and  with  employers.  Modern  creative 
processes  have  brought  multitudes  of  workers  into  direct  contact 
with  ponderous  implements  of  production  that  render  their  occupy- 


LABOR  PROBLEMS  7$! 

tions  extremely  dangerous,  and  have  also  made  expedient,  if  not 
necessary,  complicated  relations  between  owners,  managers,  superin- 
tendents, foremen,  and  employees.  In  these  modern  industrial 
organizations  the  common  worker  may  be  far  removed  from  fellow- 
employees  and  employer,  and  thus  his  individual  importance  and 
responsibility  is  often  reduced  to  a  minimum. 

Of  this  extraordinary  change  in  a  society  which  it  is  intended  to 
serve,  the  law  of  employers'  liability  has  failed  to  take  cognizance. 
In  its  absurd  respect  for  precedent,  the  law  assumes  the  conditions  of 
a  bygone  age.  The  burden  of  injury,  says  the  law  of  negligence, 
must  be  borne  by  the  individual  responsible  for  it;  yet  the  majority 
of  accidents  today  are  chargeable  to  conditions,  not  to  men.  The 
danger  of  injury,  says  the  doctrine  of  assumed  risks,  may  be  better 
known  and  provided  against  by  the  employee  than  by  the  employer; 
but,  in  a  time  of  supervision  by  technical  men  and  of  untrained  labor, 
the  reverse  is  more  often  true.  A  habitually  negligent  man,  says  the 
fellow-servant  doctrine,  may  be  detected  by  his  fellow-workers  more 
readily  than  by  his  employer,  and,  as  a  consequence,  they  are  better 
situated  to  guard  against  his  careless  acts.  But  this  too  is  a  doctrine 
of  the  past.  In  an  age  when  the  negligent  fellow-servant  may  be 
a  telegraph  operator  whom  the  railroad  trainman  never  saw,  or  a 
hoisting  engineer  who  speaks  a  different  language  from  that  of  the 
foreign-born  miner  whose  life  depends  upon  his  reliability,  the  utter 
absurdity  of  this  contention  is  made  fully  evident. 

More  than  this,  there  are  no  outgrown  principles,  such  as  the 
doctrine  of  assumed  risk  and  the  fellow-servant  doctrine,  that  may 
be  brought  to  the  aid  of  the  injured  worker.  The  employer  alone 
may  profit  from  the  application  of  archaic  legal  dogmas,  for  the 
common  law  of  employers'  liability  was  apparently  developed  under 
a  philosophy  of  social  expediency  that  protected  the  man  of  property 
against  the  claims  of  the  irresponsible  plebeian.  Whatever  may 
have  been  the  defense  of  such  a  policy  at  a  time  when  capital  was 
limited  and  the  conditions  of  industry  more  simple,  its  projection 
into  the  life  of  the  present  is  indefensible. 

Even  if  we  grant  the  comfortable  fiction  that  the  law  arbitrates 
impartially  in  Uability  cases,  the  great  difference  in  the  ease  with 
which  employer  and  employee  may  follow  its  intricate  processes 
has  seriously  handicapped  the  latter.  The  principal  obstacles  are 
the  uncertainty,  the  expense,  and  the  delay  of  Htigation — all  of  which 
fall  most  heavily  upon  the  plaintiff.    A  large  employer  may,  in  the 


752  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

knowledge  that  his  average  of  losses  is  low,  accept  serenely  an  adverse 
decision.  There  is  no  law  of  averages  to  console  the  injured  employee 
or  his  dependents.  The  loss  of  his  suit  at  law,  like  the  loss  of  his 
earning  power,  is  a  blow  that  falls  but  once.  The  employee  is  usually 
obliged  to  engage  his  attorney  upon  the  basis  of  a  contingent  fee, 
and  therefore  secures  less  expert  service  than  does  the  employer  in 
return  for  the  sum  expended.  Court  fees  are  often  difficult  for  the 
plaintiff  to  pay,  and,  as  each  step  in  the  long  proceedings  calls  for 
additional  expenditure,  the  temptation  grows  greater  and  greater  to 
settle  for  a  small  sum,  or  to  abandon  the  unequal  contest.  The  slow 
processes  of  the  law  work  no  hardship  upon  the  defendant  employer, 
but  for  the  injured  worker  or  his  dependents  it  is  often  a  starving-out 
process,  effective  in  forcing  an  inequitable  settlement.  The  law,  in 
short,  has  so  many  technicalities,  its  defenses  for  the  employer  are  so 
strong,  and  its  processes  are  so  slow,  that  worthy  claimants  with  little 
means  have  but  a  meager  chance  of  just  consideration. 

The  common  law  of  liability,  an  outgrowth  of  the  past,  is  no 
longer  in  harmony  with  the  social  organism  it  aims  to  serve,  while 
statutory  modifications  in  many  states  have  been  inadequate  to 
remedy  its  deficiencies.  Says  Elihu  Root,  "The  present  law  is 
foolish,  wasteful,  ineffective,  and  barbarous."  Its  absurd  protection 
of  property  rights  at  the  expense  of  human  interests  must  lead, 
sooner  or  later,  to  its  radical  modification,  if  not  to  its  complete 
overthrow. 

n.      A  PROGRAM   OF  REFORM 

The  study  of  the  situation  at  home  and  abroad  suggests  a  pro- 
gram for  reform,  and  its  ultimate  accomplishment  should  be  held 
constantly  in  view. 

a)  Employers  should  be  held  accountable  for  the  safety  of  surroundings 
and  equipment.  This  is  now  recognized  in  Great  Britain,  and  in 
most  of  the  states  of  Continental  Europe.  In  nine  American  states 
this  principle  is  applied  to  all  industries;  in  five  others,  to  railways; 
and  in  nineteen  more,  responsibility  is  thrown  upon  employers  who 
fail  to  comply  with  legal  requirements  concerning  stated  safety 
devices  and  precautions.  Its  general  acceptance  in  the  United 
States  would  largely  abolish  the  doctrine  of  assumed  risk,  and  greatly 
reduce  Utigation. 

b)  Employers  should  be  held  accountable  for  the  negligent  acts  of 
their  employees.  This  principle  also  is  accepted  in  most  of  the  coun- 
tries of  Europe  and  in  three  American  states.    In  ten  others  it  is 


LABOR  PROBLEMS  753 

recognized  in  part,  and  in  eighteen  more  it  applies  to  specified  indus- 
tries. Its  general  acceptance  would  abolish  the  fellow-servant 
doctrine  and  restore  the  principle  of  respondeat  superior  to  the  full 
range  of  legal  application  that  it  should  properly  have. 

c)  The  employer's  defense  of  contributory  negligence  should  be 
denied.  The  workingman's  environment  makes  constant  care 
impossible,  and  this  general  defense  against  liability  works  grave 
injustice.  Industry  should  bear  its  inevitable  accident  losses,  as 
it  bears  its  inevitable  fire  losses  and  maintenance  charges.  No 
part  of  the  burden  should  be  thrown  upon  those  whose  earning 
power  is  sacrificed.  In  most  European  nations  only  such  contribu- 
tory negligence  as  is  wilful,  unreasonable,  or  unlawful  bars  the  victim 
from  the  right  to  compensation,  and  recognition  of  the  same  principle 
should  be  an  early  reform  in  American  legislation. 

d)  Employers  should  be  held  accountable  for  unpreventable  accidents. 
In  spite  of  all  possible  precaution,  many  workingmen  are  sure  to 
be  killed  and  injured.  Neither  employers  nor  employees  are  at 
fault  in  such  cases,  but  since  such  accidents  seem  necessary  in  the 
creation  of  economic  goods,  the  burden  should  be  placed,  through 
the  employer,  upon  the  ultimate  consumer  of  the  finished  product. 
This  principle  is  fully  recognized  in  Europe,  and  is  faintly  suggested 
by  a  recent  law  in  Montana.  Its  general  acceptance  in  the  United 
States  together  with  the  recognition  of  the  first  and  second  principles 
outlined,  would  completely  abolish  the  doctrine  of  assumed  risk. 

e)  Employers  should  bear  the  burden  of  proof.  By  the  English 
Act  of  1897  it  is  made  the  part  of  the  employer  to  show  that  the  law 
is  not  applicable  to  the  case  in  question,  and  the  same  principle  has 
been  partially  accepted  on  the  Continent.  Two  American  states 
throw  the  burden  of  proof  on  the  employer  in  railroad  cases.  The 
victim  of  the  accident  is  invariably  the  weaker  party  to  the  contro- 
versy, and  the  general  acceptance  of  this  principle  would  make 
workingmen  more  secure  in  the  rights  conferred  by  other  reforms. 

/)  Compensations  should  be  paid  according  to  a  definite  scale  fixed  by 
law  and  varying  according  to  the  age  and  pecuniary  situation  of  dependents. 
The  principle  of  fixed  compensation  was  recognized  by  the  English 
Act  of  1897;  it  has  spread  to  the  British  colonies,  and  the  definite 
but  variable  scale  of  payments  and  pensions  is  a  meritorious  feature 
of  the  compensation  laws  of  the  states  on  the  Continent.  In  America 
a  few  states  set  maximum  limits  to  the  liability  of  employers  on  account 
of  any  one  casualty,  but  that  is  all.    One  of  the  most  flagrant  abuses 


754  MATERLAI^  FOR  ELEMENTARY  ECONOMICS 

under  the  existing  system  of  law  is  the  spirit  of  speculation  that 
is  fostered  by  the  ever  dazzling  possibility  of  a  large  award.  The 
establishment  of  a  definitely  variable  scale,  together  with  the  greater 
certainty  of  award  that  would  be  lent  by  the  other  reforms  outHned, 
would  go  far  in  reducing  the  volume  and  expense  of  litigation.  Fewer 
cases  would  come  to  trial,  and  jury  awards  would  be  more  readily 
accepted  without  appeal. 

g)  Payment  should  be  guaranteed  by  adequate  insurance.  A  great 
catastrophe  or  some  other  cause  often  leads  to  the  insolvency  of 
the  employer  at  a  time  when  the  injured  men  and  their  dependents 
are  most  in  need  of  assistance.  Certain  methods  of  guarantee  are 
therefore  used  in  Germany,  Austria,  France,  and  Italy,  and  more 
or  less  effective  plans  are  followed  in  other  countries.  First  hen  on 
assets  and  compulsory  state  insurance  are  most  frequently  resorted 
to.  The  statutes  of  Massachusetts  and  New  York  provide  that 
any  employer  may  partially  disburden  himself  of  Hability  by  insuring 
his  men  in  private  insurance  companies,  but  he  is  not  obliged  to 
do  so.  In  Montana  a  law  passed  in  igog  provides  a  special  tax  of 
I  per  cent  on  the  earnings  of  coal-miners  and  of  one  cent  per  ton  on 
all  coal  mined.  The  proceeds  make  up  a  state  fund  for  the  generous 
compensation  of  accidents  in  the  coal-mining  industry.  Efforts 
to  compel  employers  to  insure  their  men  against  accident  would  be 
met  with  active  resistance  in  the  United  States,  and  requirements 
as  rigid  as  those  of  Germany  and  Austria  would  be  justly  condemned 
by  public  opinion.  But  to  secure  its  citizens  in  their  personal  rights 
is  a  proper  police  function  of  the  state,  and  our  laws  should  insist 
that  employers,  at  their  own  expense,  insure  their  men  for  the  amount 
of  the  stipulated  compensations.  Such  guarantee  should  be  by 
insurance  in  private,  mutual,  or  governmental  casualty  concerns, 
or  by  the  deposit  of  approved  securities. 

h)  Compensation  payments  should  be  conserved.  Many  persons 
left  dependent  are  incompetent  to  care  for  large  sums  of  money 
suddenly  acquired.  Courts  of  proper  jurisdiction  should  be  given 
authority  to  determine  whether  lump  payments  should  be  made 
or  the  sum  invested  in  annuities.  The  pension  systems  of  the  conti- 
nental European  states  are  rich  in  the  suggestion  of  administrative 
methods  for  accompUshing  this  purpose. 

The  incorporation  of  these  principles  into  the  American  law  of 
employers'  Uability  will  be  found  a  long  and  difficult  proeess,  for 
many  obstacles  exist,  both  in  social  and  economic  conditions  and  in 


LABOR  PROBLEMS  755 

constitutional  law  and  judicial  fancy.  It  is  doubtful  if  adequate 
legislation  can  be  enacted  in  many  states  without  constitutional 
amendments,  and  it  is  not  improbable  that  an  amendment  to  the 
federal  constitution  will  be  foimd  necessary.  But  the  outlook  is 
hopeful.  Twelve  years  ago  it  was  said  of  workmen's  compensation, 
"The  very  principles  involved  are  not  as  yet  even  comprehended  in 
the  United  States."  Public  interest  has  since  been  aroused  by  the 
results  of  wide  research;  close  attention  has  been  turned  upon  every 
phase  of  the  subject,  and  it  is  one  of  the  leading  topics  before  the 
American  people  at  the  present  time.  Employers,  insurance  men, 
lawyers,  legislators,  jurists,  publicists,  and  leaders  in  social  reform 
are  focusing  attention  upon  the  question  with  a  imanimity  of  interest 
that  is  almost  unprecedented.  It  was  a  live  issue  before  the  last 
meeting  of  the  National  Civic  Federation;  it  is  constantly  before 
associations  of  manufacturers  and  other  bodies  of 'employers,  and 
there  have  been  held  within  a  year  three  national  conferences  upon 
this  question  alone.  During  the  early  months  of  1909,  changes  in 
the  law  were  under  consideration  in  at  least  seventeen  states.  Signifi- 
cant amendments  have  been  passed  in  some,  while  in  others,  notably 
in  New  York,  Wisconsin,  Minnesota,  and  Illinois,  special  commis- 
sions are  making,  or  have  completed,  more  or  less  exhaustive  studies. 
In  addition  to  this,  two  of  the  largest  American  employers,  the  United 
States  Steel  Corporation  and  the  International  Harvester  Company, 
have  instituted  accident  relief  plans  that  are  strikingly  similar  to 
the  compulsory  insurance  and  compensation  systems  of  continental 
Europe. 

The  situation  presents  a  problem  in  the  equitable  distribution 
of  the  fruits  of  industry.  Production  commands  a  sufficient  economic 
return  to  meet  all  of  its  legitimate  charges,  and  a  reasonable  portion 
should  be  turned  to  the  account  of  those  unfortunates  whom  industrial 
accidents  leave  without  means  of  Uvelihood.  The  costs  fall  with 
crushing  force  upon  the  individual  victims.  If  these  costs  were 
to  fall  upon  the  enormous  capital  and  tremendous  earning  power  of 
the  industrial  world,  they  would  seem  insignificant.  Yet  absurd 
legal  precedents  set  up  generations  ago,  and  now  dishonored  at  their 
source,  are  effective  barriers  against  proper  distribution.  Legislation 
that  pulls  down  these  barriers  will  add  much  to  the  security,  content- 
ment, and  efficiency  of  the  workers  of  American  industry. 


7S6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

215.    A  SURVEY  OF  WORKINGMEN'S  INSURANCE  IN  THE 

UNITED  STATES' 

There  are  already  various  systems  of  industrial  insurance  in  the 
United  States  which  witness  to  the  universal  sense  of  need  of  such 
protection  even  among  those  workers  who  have  least  developed  habits 
of  thrift.  These  imperfect  and  unrelated  schemes  are  yet  to  be 
developed,  co-ordinated,  regulated,  and  combined  so  as  to  form  a 
consistent,  comprehensive,  and  adequate  system.  The  hope  of 
progress  Ues  in  these  germinal  beginnings,  and  the  problem  imme- 
diately before  the  nation  is  one  of  synthesis. 

Is  universal  insurance  an  economic  possibility?  A  complete 
answer  to  this  question  would  require  extended  discussion.  A  few 
things  may  be  suggested.  The  profit  fund  could  carry  a  very  large 
share  of  the  burden,  as  shown  by  the  fact  that  employers  are  marvel- 
ously  prosperous,  and  by  the  fact  that  even  now,  though  in  a  very 
uncertain  way,  they  set  apart  a  vast  sum  for  helping  workmen  in 
times  of  disability  in  the  form  of  contributions  to  sickness  funds, 
hospitals,  physicians,  and  gifts  to  families  in  distress,  not  to  speak 
of  taxes  for  public  relief  and  enormous  costs  for  casualty  insurance 
and  litigation,  which  is  now  waste.  The  wages  fund  could  bear  a 
much  heavier  drain  for  insurance  if  we  can  judge  from  the  immense 
sums  spent  by  workmen  for  objects  which  are  destructive  to  health 
and  morals.  It  is  true  that  the  unskilled  workmen  have  no  margin 
for  adequate  insurance,  and  those  who  cannot  supply  even  the 
immediate  necessities  of  existence  can  hardly  be  expected  to  provide 
for  the  future  without  help  from  the  profit  fund  and  from  consumers. 

Systems  ayid  schemes  of  industrial  insurance. — (i)  The  workingmen 
have  themselves  created  organizations  for  insurance,  and  thereby 
express  a  universal  sense  of  need  of  this  protection;  local  mutual 
benefit  societies,  with  or  without  aid  from  employers,  national 
brotherhoods  or  fraternals,  and  trade-unions  with  local  branches. 
(2)  Employers  have  promoted  the  movement  by  various  methods: 
local  societies  of  employees,  insurance  departments  of  great  firms 
or  corporations,  contracts  between  firms  and  casualty  companies, 
pension  schemes  of  employing  corporations.  (3)  Private  insurance 
companies  which  sell  sickness  and  accident  insurance  to  workmen, 
"industrial  insurance  companies,"  collecting  small  premiums  weekly 
or  monthly,  and  furnishing  chie%  burial  benefits  to  the  low-paid 

•  Adapted  from  C.  R.  Henderson,  Industrial  Insurance  in  the  United  States, 
chap.  xii.    The  University  of  Chicago  Press,  1909. 


LABOR  PROBLEMS  757 

(vorkmen,  and  regular  life  insurance  to  those  who  have  higher  wages. 
(4)  Organizations  of  municipal,  state,  and  federal  employees  for 
pension  funds,  as  those  of  teachers,  firemen,  policemen;  the  national 
and  state  military  pensions;  homes  for  invalid  veterans.  Here  also 
may  be  counted  as  auxiliary  and  supplementary  government  activities, 
poor  relief,  liability  laws,  protective  factory  laws  and  inspection,  and 
state  supervision  of  fraternal  societies  and  insurance  corporations. 
Every  one  of  these  agencies  and  organizations  represents  some  begin- 
ning of  a  movement  toward  obligatory  insurance.  The  cities  have 
already  recognized  their  duty  to  care  for  the  policemen,  firemen,  and 
teachers;  and  it  will  be  difficult  to  answer  the  question  of  other 
employees  of  cities,  many  of  them  far  more  in  need  of  protection, 
why  they  should  not  be  included.  The  nation  and  the  states  have 
already  declared  it  to  be  our  duty  to  shelter  the  aged  and  wounded 
soldier;  why  should  the  victims  of  the  "army  of  labor"  be  neglected  ? 
They  also  have  served  their  country  in  occupations  even  more  danger- 
ous and  destructive  than  war,  and  quite  as  usefuk  Public  poor 
relief  has  already  acknowledged  the  duty  of  the  community  to  support 
its  members  who  are  incapable  of  labor;  but  experience  has  taught 
that  this  method  tends  to  humiliate  and  degrade  the  recipients  and 
it  is  manifestly  better  from  every  point  of  view  to  prevent  the  need 
of  appeal  to  poor  relief  by  creating  an  insurance  fund  so  far  as  this 
is  possible. 

Sickness  insurance. — The  present  organs  of  sickness  insurance 
are:  local  mutual  benefit  societies,  lodges  of  the  trade-unions  and 
fraternal  societies,  relief  departments  of  railroads,  and  casualty 
companies.  Naturally  this  form  of  insurance  is  most  widely  developed 
among  the  workmen  of  cities.  Everywhere  the  organization  is 
voluntary,  unless  we  may  speak  of  constraint  to  enter  the  relief 
departments  and  other  similar  arrangements  as  a  condition  of  employ- 
ment as  compulsion.  The  local  societies  are  seldom  united  in  groups, 
and  each  bears  its  burden  alone.  Central  direction  and  supervision 
by  the  state  are  unknown.  The  lodges  of  the  fraternal  societies  and 
of  some  of  the  trade-unions  work  under  control  from  a  central  legis- 
lature. The  administration  of  the  relief  departments  is  in  the  hands 
of  committees  representing  both  employers  and  employees.  Those 
who  simulate  sickness  are  discovered  by  medical  examination,  or 
by  visits  of  committees.  None  of  these  agencies  rests  on  a  strictly 
scientific  basis  approved  by  actuaries.  Even  the  rates  of  the  insur- 
ance companies  rest  chiefly  on  empirical  foundations,  may  be  changed 


7S8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

at  any  time,  and  are  determined  largely  by  competition.  Frequently 
the  companies  regard  each  other  with  such  suspicion  that  a  common 
registration  is  said  to  be  impossible;  a  fact  much  to  be  regretted, 
since  a  comparison  of  experience  would  aid  in  giving  the  movement 
the  light  of  the  widest  and  most  varied  experience.  For  the  settle- 
ment of  disputes  between  members  and  the  directors,  or  between 
holders  and  companies,  the  courts  are  open;  but  this  is  a  way  too 
costly  and  tedious  to  be  taken  into  consideration.  It  would  be  one 
of  the  advantages  of  compulsory  insurance  that  the  state  could  provide 
a  simple  and  inexpensive  arrangement  for  hearing  and  deciding  cases 
impartially. 

Accident  insurance. — The  employers'  liability  law  remains  in  its 
ancient  limits;  it  is  behind  the  British  compensation  act  of  1897 
and  much  farther  behind  the  German  insurance  law  of  1884.  The 
principle  that  social  care  in  any  explicit  way  is  a  duty  of  the  com- 
munity has  never  been  openly  recognized.  The  injured  man  stands 
at  once  over  against  his  employer  as  an  enemy  seeking  damages  even 
of  a  punitive  character.  Before  he  can  recover  damages  he  must 
prove,  with  the  presimiption  against  him,  that  the  injury  can  be 
traced  to  the  negligence  of  the  employer  and  is  actually  due  to  such 
negligence.  Compulsory  insurance  or  even  compensation  is  not  a 
part  of  the  legal  provisions.  Voluntary  organizations,  fragmentary 
and  unfair  in  character,  are  further  developed  with  the  railroads  than 
elsewhere.  In  agriculture  there  is  hardly  a  discoverable  attempt  in 
this  direction. 

The  railroads  have  generally  sought  to  insure  their  employees 
either  through  agreements  with  casualty  companies  or  by  relief 
departments;  but  the  employees  must  carry  the  greater  part  of  the 
burden.  The  employers  in  other  dangerous  trades  have  often . 
organized  accident  insurance,  but  generally  the  schemes  load  the 
employees  with  premiums,  cover  only  a  part  of  the  real  loss,  and  lack 
full  actuarial  basis.  There  is  nowhere  state  supervision,  or  direc- 
tion, no  obligation  to  insure,  no  unity  or  uniformity  of  method; 
mostly  anarchy.  Xhe  administration  varies  with  the  form  of  organi- 
zation: in  the  mutual  benefit  associations  the  matter  is  directed  by  a 
committee  with  officers  and  clerks;  in  the  trade-unions  the  lodge 
governs  the  direction;  and  in  casualty  companies  all  is  administered 
by  the  central  office. 

Payment  of  income  of  funds. — In  the  relief  departments  of  railroads 
and  in  the  casualty  companies  the  fund  is  provided  by  payment  of 


LABOR  PROBLEMS  759 

premiums  at  intervals  in  advance.  No  example  has  been  found  of 
groups  of  employers  federated  to  provide  accident  insurance;  and, 
indeed,  the  motive  is  lacking  for  such  organization.  It  is  significant 
that  employers  have  organized  such  associations  for  fire  insvTrance, 
in  competition  with  the  companies,  and  these  seem  to  have  worked 
well.  The  assessment  plan  of  payment  is  customary  in  some  life 
insurance  companies,  in  fraternal  societies,  and  in  trade-unions, 
certain  sums  being  levied  at  a  death  or  at  intervals  during  the  year. 
In  settlement  of  disputes  we  have  only  contracts,  conferences,  and, 
in  the  last  resort,  the  lawsuit. 

Old  age  and  invalidism. — ^A  few  of  the  trade-unions  have  begun 
to  establish  funds  for  old-age  retirement  benefits.  The  fraternal 
societies  exhibit  a  serious  defect  at  this  point.  Under  their  system 
they  can  carry  life  insurance  only  to  the  region  of  old  age  and  then 
the  "brother"  must  care  for  himself,  a  very  inconsistent  kind  of 
fraternity,  yet  inseparable  from  present  methods.  The  Mutualists 
of  France  have  gone  much  farther  in  meeting  this  diflficulty  by  estab- 
lishing funds  for  old  age  and  invalidism.  Some  of  the  railroad 
corporations  and  even  private  firms  have  founded  funds  for  old-age 
pensions  and  this  movement  seems  to  be  growing  in  the  country. 
Cities  have  pension  funds  for  policemen,  firemen,  and  to  some  extent 
for  teachers.  The  nation  and  the  states  have  made  the  old  age  of 
veterans  comfortable.  It  is  perfectly  clear  that  the  common  laborers 
of  cities  can  never  on  present  wages  provide  for  old  age  without  help 
of  employers  and  the  public;  the  outlook  is  simply  hopeless.  The 
income  of  the  workingmen  of  cities  is  too  small  and  too  irregular  to 
warrant  any  unaided  attempt  to  provide  for  the  last  period  of  life. 
In  the  United  States  there  is  no  example  even  of  state  subsidies  to 
encourage  voluntary  associations,  as  in  France  and  in  Belgium. 
Powerful  and  wealthy  corporations,  as  railroads,  canals,  ship  builders, 
have  not  been  above  asking  the  government  for  subsidies  to  aid 
"infant  industries,"  even  when  those  industries  have  become  aged 
and  corpulent,  but  they  would  brand  any  attempt  to  subsidize  old- 
age  funds  for  workingmen  as  rank  "socialism." 

Various  are  the  methods  of  providing  funeral  funds  and  life 
insurance.  The  poorest  workmen  of  America  count  among  their 
most  necessary  expenses  the  premiums  which  will  provide  money  for 
a  respectable  funeral.  Sickness  and  accident  insurance  come  later, 
and  the  contingency  of  need  in  old  age  is  to  their  imagination  far 
more  remote.    The   colossal   sums  poured  annually  from  slender 


76o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

incomes  into  the  coffers  of  the  "industrial  insurance"  companies  arc 
witness  of  the  spirit  of  sacrifice  which  is  inspired  by  the  sentiment  of 
repugnance  to  burial  at  public  expense.  The  benefit  departments 
of  the  fraternal  societies  and  fraternal  insurance  societies  prove  the 
interest  of  skilled  artisans  in  providing  for  future  wants  by  insurance. 
Comparatively  little  has  been  done  for  unemployment  insurance. 
Apart  from  occasional  gifts  of  cities,  or  hastily  planned  emergency 
works,  the  public  has  manifested  no  interest  in  this  burning  question. 
During  the  past  years  of  unexampled  and  long-continued  prosperity 
the  occasion  for  such  insurance  has  not  been  so  clear  as  it  would  be 
in  a  period  of  depression. 


LABOR  PROBLEMS 


761 


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XVII.    INTEREST 

217.    THEORIES  OF  INTEREST 
I' 

Early  Theories. — An  objection,  formerly  common,  to  the  practice 
of  taking  interest  was  that  interest  is  "unnatural."  The  word  em- 
ployed among  the  Greeks  to  signify  interest  or  usury  was  tokos, 
" offspring";  and  Aristotle  declaimed  against  the  taking  of  interest, 
on  the  ground  that  money  could  not  have  "offspring" — a  curious 
instance  of  the  influence  of  terminology  on  thought. 

Interest-taking  between  Jews  was  forbidden  by  the  Mosaic  laws, 
and  similarly,  in  Rome,  interest-taking  between  Romans  was  pro- 
hibited. Many  biblical  texts  show  the  hostile  attitude  of  the  writers, 
both  in  the  Old  and  New  Testaments,  toward  the  practice,  and  the 
Church  Fathers  through  the  Middle  Ages  for  over  a  thousand  years 
waged  a  ceaseless  but  fruitless  war  against  interest-taking.  St. 
Thomas  Aquinas  stated  that  interest  was  an  attempt  to  extort  a 
price  for  the  use  of  things  which  had  already  been  used  up,  as  for 
instance,  grain  and  wine.  He  also  declared  that  interest  constituted 
a  payment  for  time,  and  that  time  was  a  free  gift  of  the  Creator  to 
which  all  have  a  natural  right. 

The  unpopularity  of  interest-taking  increased  until  the  thirteenth 
century;  but  the  practice  persisted,  and  as  business  operations  in- 
creased in  importance,  certain  exemptions  and  exceptions  from  its 
general  prohibition  were  secured.  Pawnshops  banks,  and  money- 
lenders were  specially  licensed,  and  permission  was  granted  for  buying 
annuities,  and  taking  land  on  mortgage  for  money  loaned.  One  of 
the  subterfuges  by  which  the  allowance  of  interest  was  excused  sug- 
gests the  true  idea  of  interest  as  an  index  of  the  relative  preference  for 
present  over  future  goods.  It  was  conceded  that,  whereas  a  loan 
should  be  nominally  without  interest,  yet  when  the  debtor  delayed 
payment,  he  should  be  fined  for  his  delay  (mora),  and  the  creditor 
should  receive  compensation  in  the  form  of  interesse.  Through  this 
loophole  it  became  common  to  make  an  understanding  in  advance, 
by  which  the  payment  of  a  loan  should  be  "delayed"  year  after  year, 
and  with  every  such  postponement  a  "fine  "should  become  payable. 

'  From  Irving  Fisher,  The  Rate  of  Interest,  pp.  4-7.     The  Macmillan  Co.,  1907. 

76  a 


INTEREST  763 

Some  of  the  Protestant  reformers,  while  not  denying  that  interest- 
taking  was  wrong,  admitted  that  it  was  impossible  to  suppress  it,  and 
that  it  should  therefore  be  tolerated.  This  toleration  was  in  the  same 
spirit  as  that  in  which  many  reformers  today  defend  the  licensing 
of  vicious  institutions,  such  as  saloons,  racetracks,  lotteries,  and  houses 
of  prostitution. 

In  the  sixteenth  century  interest-taking  began  to  find  some  definite 
champions.  Calvin  attempted  to  discriminate  between  interest- 
taking  which  was  right  and  interest-taking  which  was  wrong.  Among 
the  wrong  kinds  he  classed  the  taking  of  interest  from  the  poor  and 
from  those  in  urgent  need,  and  the  taking  of  interest  in  excess  of  a 
legal  maximum. 

In  order  to  defend  interest,  its  champions  began  to  construct 
theories  to  account  for  the  phenomenon.  Most  of  these  early  theories 
were  little  more  than  a  shifting  of  the  problem.  It  was  seen  that 
capital  earned  income  whether  it  was  lent  or  not.  The  income  which 
a  lender  obtains  through  a  loan  contract  may  be  called  explicit  interest; 
but  it  was  clear  that  the  borrower  was  enabled  to  pay  this  interest 
because  the  capital  which  he  borrowed  earned  it  for  him.  The  income 
which  capital  thus  earns  may  be  called  implicit  interest.  The  earliest 
attempt  to  construct  a  theory  of  interest  merely  explained  explicit 
interest  in  terms  of  implicit  interest.  Salmasius  and  Locke,  both  in 
the  seventeenth  century,  attempted  thus  to  explain  interest.  They 
tried  to  justify  the  taking  of  interest  in  a  loan  on  the  ground  that  an 
equivalent  to  that  interest  was  obtained  by  the  borrower  from  the 
capital  he  borrowed,  and  might  have  been  obtained  by  the  lender  of  the 
capital  had  he  retained  it.  If,  they  said,  a  man  lends  $1000,  he  is 
entitled  to  interest  upon  it  because,  had  he  used  it  in  business  himself, 
he  could  have  made  profits  by  means  of  it.  But  beyond  the  bare 
statement  that  unlent  capital  yields  income,  these  theories  did  not  go. 
The  real  problem — "why  capital  yields  income  to  the  user" — was 
left  untouched. 

The  theories  just  described  are  for  the  most  part  obsolete  today; 
yet  we  have  a  number  of  other  theories  almost  equally  crude.  If  a 
modern  business  man  is  asked  what  determines  the  rate  of  interest, 
he  may  usually  be  expected  to  answer,  "the  supply  and  demand  of 
loanable  money."  But  "supply  and  demand"  is  a  phrase  which  has 
been  too  often  forced  into  service  to  cover  up  diflicult  problems. 
Even  economists  have  been  prone  to  employ  it  to  describe  economic 


764  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

causation  which  they  could  not  unravel.  It  was  once  wittily  remarked 
of  the  early  writers  on  economic  problems,  "  Catch  a  parrot  and  teach 
him  to  say  'supply  and  demand,'  and  you  have  an  excellent  economist." 
Prices,  wages,  rent,  interest,  and  profits  were  thought  to  be  fully 
"  e.x]:)lained "  by  this  glib  phrase.  It  is  true  that  every  ratio  of 
exchange  is  due  to  the  resultant  of  causes  operating  on  the  buyer  and 
seller,  and  we  may  classify  these  as  "demand"  and  "supply."  But 
this  fact  does  not  relieve  us  of  the  necessity  of  examining  specifically 
the  two  sets  of  causes,  including  utility  and  its  effect  on  demand, 
and  cost  in  its  effect  on  supply.  Consequently,  when  we  say  that 
the  rate  of  interest  is  due  to  the  supply  and  demand  of  "capital" 
or  of "  money  "  or  of  "  loans,"  we  are  very  far  from  having  an  adequate 
explanation.  It  is  true  that  when  merchants  seek  to  discount  bills 
at  a  bank  in  large  numbers  and  for  large  amounts,  the  rate  of  interest 
will  tend  to  be  high,  and  that  when  merchants  do  not  apply  in  large 
numbers  and  for  large  amounts,  the  rate  of  interest  will  tend  to  be 
low.  But  we  must  inquire  for  what  purposes  and  from  what  causes 
merchants  thus  apply  to  a  bank  for  the  discount  of  loans,  and  why  it  is 
that  some  apply  to  the  bank  for  loans  and  other  supply  the  bank  with 
funds  to  be  loaned.  The  real  problem  is:  What  causes  make  the 
demand  for  loans,  and  what  causes  make  the  supply  ?  This  question 
is  not  answered  by  the  summary  "supply  and  demand"  theory.  The 
explanation  is  not  simply  that  those  who  have  much  capital  supply 
the  loans  and  those  who  have  little  demand  them.  In  fact,  the  con- 
trary is  quite  often  the  case.  The  depositors  in  savings  banks  are 
the  lenders,  and  they  are  usually  poor,  whereas  those  to  whom  the 
savings  bank  in  turn  lends  the  funds  are  relatively  rich. 

II' 

The  essential  features  as  regards  our  problem,  are  that,  over  a 
year's  time,  manufactured  products  are  sold  at  a  price  which  not  only 
covers  the  value  of  raw  materials,  reimburses  the  various  wages  of 
manual  and  intellectual  labor,  and  replaces  the  fixed  capital  as  worn 
out,  but  leaves  over  that  amount  of  value  which  is  divided  out  among 
the  capitalist  shareholders  as  interest.  In  normal  capitalist  pro- 
duction, that  is  to  say,  not  only  is  the  value  of  capital  consumed  in 
the  production  process  replaced,  but  a  surplus  of  value  appears.  It 
has  not  always  been  perceived  by  economists  that  this  surplus  value 

'  Adapted  from  William  Smart's  Translator's  Preface  to  Capital  and  Interest, 
by  Eugen  von  Bohm-Bawerk,  pp.  vii-xvii.     Macmillan  &  Co.,  1890. 


INTEREST     .  765 

is  the  essential  phenomenon  of  what  we  call  interest — that  interest  on 
capital  consists  of  this  very  surplus  value  and  nothing  else — but  when- 
ever it  is  perceived  the  question  almost  suggests  itself:  What  does  this 
surplus  value  represent  ?  Is  it  merely  a  surplus,  or  is  it  of  the  nature 
of  a  wage  ?  In  other  words,  is  it  something  obtained  either  by  chance 
or  force,  and  corresponding  to  no  service  rendered  by  anybody  or 
anything;  or  is  it  something  connected  with  capital  or  the  capitalist 
that,  economically  speaking,  deserves  a  return  or  a  wage  ? 

A  little  consideration  will  show  that  the  idea  of  a  "mere  surplus" 
is  untenable.  When  a  manufacturer  engages  his  capital  in  production 
he,  as  it  were,  throws  it  into  solution,  and  risks  it  all  on  the  chance 
of  the  consuming  public  paying  a  certain  price  for  the  products 
into  which  his  capital  is  transformed.  If  they  will  not  pay  any  price 
at  all  the  capital  never  reappears;  even  the  labor,  which  bound  up 
its  fortunes  with  the  materials  and  machinery  of  manufacture,  loses 
its  wage,  or  would  do  so  except  for  the  wage  contract  which  pays 
labor  in  advance.  If  the  consumers,  again,  will  only  pay  a  price 
equal  to  the  value  of  the  capital  consumed,  the  various  workers, 
including  the  employer  proper,  will  get  their  wage  and  the  value  of 
the  capital  itself  will  be  unimpaired,  but  there  will  be  no  interest.  It 
is  only  if  the  consumers  are  willing  to  pay  a  higher  price  that  capital 
can  get  its  interest. 

The  surplus  then  may  be  assumed  to  represent  something  con- 
tributed by  the  capital  to  the  value  of  products.  This  view  is  sup- 
ported by  the  common  consciousness  of  practical  men,  who  certainly 
believe  that  capital  plays  a  distinct  and  beneficent  role  in  production. 

If,  now,  we  appeal  to  the  common  consciousness  to  say  what  it 
is  that  capital  does,  or  forbears  to  do,  that  it  should  receive  interest, 
we  shall  probably  get  two  answers.  One  will  be  that  the  owner  of 
capital  contributes  a  valuable  element  to  production;  the  other,  that 
he  abstains  from  using  his  wealth  in  his  own  immediate  consumption. 
On  one  or  other  of  these  grounds,  the  capitalist  is  said  to  deserve  a 
remuneration,  and  this  remuneration  is  obtained  by  him  in  the  shape 
of  interest. 

Now  it  might  possibly  be  the  case  that  both  answers  point  to 
elements  indispensable  in  the  explanation  of  interest,  but  a  slight 
consideration  will  show  that  the  two  answers  are  very  different  from 
one  another.  The  one  is  positive — that  capital  does  something;  the 
other  negative — that  the  capitalist  abstains  from  doing  something. 
In  the  one  case  interest  is  a  payment  for  a  tool;  in  the  other,  a  recom- 


766  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

pense  for  a  sacrifice.  In  the  one  case  the  capitalist  is  paid  because  the 
capital  he  lends  produces,  or  helps  to  produce,  new  wealth;  in  the 
other  he  is  paid  because  he  abstains  from  diminishing  wealth  already 
produced.  The  first  answer  is  the  basis  of  the  Productivity  theories 
and  of  the  Use  theories;  the  second  is  the  basis  of  the  Abstinence 
theory. 

The  argimient  of  the  Productivity  theory  may  be  put  thus: 
Human  labor,  employing  itself  on  the  materials  given  free  by  nature, 
and  making  use  of  no  powers  beyond  the  natural  forces  which  manifest 
themselves  alike  in  the  laborer  and  in  his  environment,  can  always 
produce  a  certain  amount  of  wealth.  But  when  wealth  is  put  into 
the  active  forms  of  capital — of  which  machinery  may  be  taken  as 
instance  and  type — and  capital  becomes  intermediary  between  man 
and  his  environment  of  nature,  the  result  is  that  the  production  of 
wealth  is  indefinitely  increased.  The  dMerence  between  the  results 
of  labor  unassisted  and  labor  assisted  by  capital  is,  therefore,  due  to 
capital,  and  its  owner  is  paid  for  this  service  by  interest. 

The  simpler  forms  of  this  theory  (where  capital  is  credited  with  a 
direct  power  of  creating  value,  or  where  surplus  of  products  is  tacitly 
assumed  to  be  the  same  thing  as  surplus  of  value)  Bohm-Bawerk 
has  called  the  Naive  theory.  The  more  complex  formulations  of  it 
— where,  for  instance,  emphasis  is  laid  on  the  displacement  of  labor 
by  capital,  and  interest  is  assumed  to  be  the  value  formerly  obtained 
as  wage,  or  where  prominence  is  given  to  the  work  of  natural  powers 
which,  though  in  themselves  gratuitous,  are  made  available  only  in  the 
forms  of  capitalist  production — he  has  called  the  Indirect  theories. 

If,  however,  we  demand  an  answer  to  what  we  have  formulated 
as  the  true  problem  of  interest,  we  shall  make  the  discovery  that  the 
Productivity  theory  has  not  even  put  that  problem  before  itself. 
The  amount  of  truth  in  the  theory  is  that  capital  is  a  most  powerful 
factor  in  the  production  of  wealth,  and  that  capital,  accordingly,  is 
highly  valued.  But  to  say  that  capital  is  "productive"  does  not 
explain  interest,  for  capital  would  still  be  productive  although  it 
produced  no  interest;  e.g.,  if  it  increased  the  supply  of  commodities 
the  value  of  which  fell  in  inverse  ratio,  or  if  its  products  were,  both 
as  regards  quantity  and  value,  greater  than  the  products  of  unassisted 
labor.  The  theory,  that  is  to  say,  explains  why  the  manufacturer  has 
to  pay  a  high  price  for  raw  materials,  for  the  factory  buildings,  and 
for  machinery — the  concrete  forms  of  capital  generally.  It  does  not 
explain  why  he  is  able  to  sell  the  manufactured  commodity,  which  is 


INTEREST  767 

simply  these  materials  and  machines  transformed  by  labor  into 
products,  at  a  higher  price  than  the  capital  expended.  It  may  explain 
why  a  machine  doing  the  work  of  two  laborers  is  valued  at  £100,  but 
it  does  not  explain  why  capital  of  the  value  of  £100  now  should  rise  to 
the  value  of  £105  twelve  months  hence;  in  other  words,  why  capital 
employed  in  production  regularly  increases  to  a  value  greater  than 
itself.  It  cannot  be  too  often  reiterated  that  the  theory  which 
explains  interest  must  explain  surplus  value — not  a  surplus  of  products 
which  may  obtain  value  and  may  not;  not  a  surplus  of  value  over  the 
amount  of  value  produced  by  labor  unassisted  by  capital;  but  a  sur- 
plus of  value  in  the  product  of  capital  over  the  value  of  the  capital 
consumed  in  producing  it. 

I  confess  I  find  some  difficulty  in  stating  the  economic  argument 
of  what  Bohm-Bawerk  has  called  the  Use  theory  of  interest,  and  I 
am  almost  inclined  to  think  that  he  has  done  too  much  honor  to  some 
economists  in  ascribing  to  them  this  theory,  or,  indeed  any,  definite 
theory  at  all. 

It  is  of  course  a  familiar  expression  of  everyday  life  that  interest 
is  the  price  paid  for  the  "use  of  capital,"  but  most  writers  seem  to 
have  accepted  this  formula  without  translating  it.  If  the  formula, 
however,  is  considered  to  contain  a  scientific  description  of  interest, 
we  must  take  the  word  "use"  in  something  like  its  ordinary  signifi- 
cation, and  consider  the  "use  of  capital"  as  something  distinct  from 
the  capital  itself  which  affords  the  use.  The  loan  then  will  be  a 
transfer  and  sale  of  this  "use,"  and  it  becomes  intelligible  how,  at 
the  end  of  the  loan  period,  the  capital  lent  is  returned  undeteriorated 
in  value;  it  was  not  the  capital  that  was  lent,  but  the  use  of  the  capital. 
To  put  it  in  terms  of  Bastiat's  classical  illustration:  James,  who 
lends  a  plane  to  William,  demands  at  the  year's  end  a  new  plane  in 
place  of  the  one  worn  out,  and  asks  in  addition  a  plank,  on  the  os- 
tensible ground  that  over  a  year  William  had  the  advantage,  the  use  of 
the  plane. 

If,  however,  we  look  carefully  into  this  illustration,  we  shall  see 
that  William  not  only  had  the  use  of  the  plane  but  the  plane  itself,  as 
appears  from  the  fact  that  the  plane  was  worn  out  during  the  year. 
Here  then  the  using  of  the  plane  is  the  same  thing  as  the  consumption 
of  the  plane;  payment  for  a  year's  "use"  is  payment  for  the  whole 
capital  value  of  the  plane.  Yet  the  payment  demanded  at  the  year's 
end  is  not  the  capital  value  of  the  plane,  the  sum  lent,  but  also  a 
surplus,  a  plank,  under  the  name  of  interest.    To  put  it  another  way: 


768  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

If  William  on  the  ist  of  January  had  bought  the  plane  outright  from 
James,  he  would  have  paid  him  on  that  date  a  value  equivalent,  say, 
to  a  precisely  similar  plane;  he  would  have  had  the  "use"  of  the  plane 
over  365  days;  and  by  31st  December  the  plane  would  have  been 
consumed.  As  things  are,  he  pays  nothing  on  ist  January;  he  has  the 
use  of  the  plane  over  the  year;  by  31st  December  the  plane  is  consumed ; 
and  next  day  he  has  to  pay  over  to  James  a  precisely  similar  plane 
plus  a  plank.  The  essential  difference  between  the  two  transactions 
is  that,  on  ist  January  the  price  of  the  plane  is  another  similar  plane; 
on  31st  December  it  is  a  plane  plus  a  plank. 

The  true  nature  of  the  loan  transaction  is,  not  that  in  it  we  get  the 
use  of  capital  and  return  it  deteriorated,  but  that  we  get  the  capital 
itself,  consume  it,  and  pay  for  it  by  a  new  sum  of  value  which  some- 
how includes  interest.  If,  however,  we  admit  this,  we  are  landed  in  the 
old  problem  once  more — how  do  goods,  when  used  as  capital  in  pro- 
duction, increase  in  value  to  a  sum  greater  than  their  own  original 
value?  and  the  Use  theory  ends  in  raising  all  the  difficulties  of  the 
Productivity  theories. 

We  have  seen  that  the  previous  theories  were  founded  on  some 
positive  work  supposed  to  be  done  by  capital.  The  Abstinence 
theory,  on  the  other  hand,  is  founded  on  the  negative  part  played  by 
the  capitalist.  Wealth  once  produced  can  be  used  either  in  immediate 
consumption — that  is,  for  the  purposes  to  which,  in  the  last  resort,  all 
wealth  is  intended;  or  it  can  be  used  as  capital — that  is,  to  produce 
more  wealth,  and  so  increase  the  possibilities  of  future  consumption. 
The  owner  of  wealth  who  devotes  it  to  this  latter  purpose  deserves  a 
compensation  for  his  abstinence  from  using  it  in  the  former,  and  inter- 
est is  this  compensation.  It  must  be  carefully  noted  that  the  absti- 
nence here  spoken  of  is  not  abstinence  from  personal  employment  of 
capital  in  production — that  would  simply  throw  us  back  on  the 
previous  question,  viz.,  how  the  owner  could  make  interest  (as 
distinct  from  wage)  by  the  use  of  his  capital — but  abstinence  from 
immediate  consumption  in  the  many  forms  of  personal  enjoyment 
or  gratification. 

At  the  back  of  this  theory  of  interest  is  that  theory  of  value  which 
makes  it  depend  upon  costs  of  production.  Senior,  the  first  and  princi- 
pal apostle  of  the  Abstinence  theory,  saw  very  clearly  that  the  inclu- 
sion of  interest  or  profit  among  costs  was  an  abuse  of  language.  The 
word  "Cost"  implies  sacrifice,  not  surplus.  But  in  production,  as  it 
seemed  to  him,  there  was  another  sacrifice  besides  the  prominent  one 


INTEREST  769 

of  labor,  that  of  abstinence,  and  interest  in  his  view  was  the  compensa- 
tion for  this  sacrifice. 

But  to  account  for  the  origin  of  capital  by  abstinence  from  con- 
sumptive use  is  one  thing;  to  account  for  interest  is  another.  In  all 
production  labor  sacrifices  life,  and  capital  sacrifices  immediate  enjoy- 
ment. It  seems  natural  to  say  that  one  part  of  the  product  pays 
wage  and  another  pays  interest,  as  compensation  for  the  respective 
sacrifices.  But  labor  is  not  paid  because  it  makes  a  sacrifice,  but 
because  it  makes  products  which  obtain  value  from  human  wants; 
and  capital  does  not  deserve  to  be  paid  because  it  makes  sacrifices — 
which  is  a  matter  of  no  concern  to  anyone  but  the  capitalist — but 
because  of  some  useful  effect  produced  by  its  co-operation.  Thus 
we  come  back  to  the  old  question:  What  service  does  capital  render 
that  the  abstinence  which  preserves  and  accumulates  it  should  get  a 
perpetual  payment  ?  And  if,  as  we  saw,  productivity  cannot  account 
for  interest,  no  more  can  abstinence. 

Now  if,  when  the  onus  of  justifjdng  its  existence  is  thrown  upon 
capital,  economic  theory  can  only  account  for  this  income  without  risk 
and  without  work  by  pointing  to  the  "productive  power"  of  capital, 
or  to  the  "sacrifice  of  the  capitalist,"  it  is  easy  to  see  how  another 
theory  should  make  its  appearance,  asserting  that  interest  is  nothing 
else  than  a  forced  contribution  from  helpless  or  ignorant  people;  a 
tribute,  not  a  tax.  Rodbertus'  picture  of  the  working  man  as  the 
lineal  descendant  of  the  slave — "hunger  a  good  substitute  for  the 
lash  " ;  Lassalle's  mockery  of  the  Rothschilds  as  the  chief  "  abstainers  " 
in  Europe;  Marx's  bitter  dialectic  on  the  degradation  of  labor,  are  all 
based  on  generous  sympathy  with  the  helpless  condition  of  the  working 
classes  under  capitalist  industry,  and  many  shut  their  eyes  to  the  weak- 
ness of  Socialist  economics  in  view  of  the  strength  of  Socialist  ethics. 

The  Exploitation  theory  then  makes  interest  a  concealed  contri- 
bution; not  a  contribution,  however,  from  the  consumers,  but  from 
the  workers.  Interest  is  not  a  pure  surplus  obtained  by  combination 
of  capitalists.  It  does  represent  a  sacrifice  made  in  production,  but 
not  a  sacrifice  of  the  capitalists.  It  is  the  unpaid  sacrifice  of  labor. 
It  has  its  origin  in  the  fact  that  labor  can  create  more  than  its  own 
value.  A  laborer  allowed  free  access  to  land,  as  in  a  new  country, 
can  produce  enough  to  support  himself  and  the  average  family,  and 
have  besides  a  surplus  over.  Translate  the  free  laborer  into  a  wage 
earner  under  capitalism,  pay  him  the  wage  which  is  just  sufficient  to 
support  himself  and  his  family,  and  here  also  it  is  the  case  that  he  can 


77©  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

produce  more  than  his  wage.  Suppose  the  laborer  to  create  the  value 
of  his  wage,  in  six  hours'  work,  then,  if  the  capitalist  can  get  the 
worker  to  work  longer  than  six  hours  for  the  same  wage,  he  may  pocket 
the  extra  value  in  the  name  of  pro6t  or  interest.  Here  the  modern 
conditions  of  industry  favor  the  capitalist.  The  working  day  of  ten 
to  twelve  hours  is  a  sort  of  divine  institution  to  the  ignorant  laborer. 
As  the  product  does  not  pass  into  his  own  hand,  he  has  no  means  of 
knowing  what  the  real  value  of  his  day's  work  is.  The  only  lower  limit 
to  his  wage  is  that  sum  which  will  just  keep  himself  and  his  family 
alive,  although,  practically,  there  is  a  lower  limit  when  the  wife  and 
children  become  the  breadwinners  and  the  capitalist  gets  the  labor  of 
five  for  the  wage  of  one.  On  the  other  hand,  the  increase  of  wealth 
over  population  gradually  displaces  labor,  and  allows  the  same  amount 
of  work  to  be  done  by  fewer  hands;  this  brings  into  existence  a 
"reserve"  to  the  industrial  army,  always  competing  with  those  left 
in  work,  and  forcing  down  wages.  Thus  the  worker,  unprotected, 
gets  simply  the  reproduced  value  of  a  portion  of  his  labor;  the  rest 
goes  to  capital,  and  is  falsely,  if  conscientiously,  ascribed  to  the 
eflBciency  of  capital. 

Ill 

The  Agio  and  Impatience  Theories  of  Interest. — The  discussion 
in  the  preceding  section  has  at  several  points  suggested  that  the  source 
of  interest  may  be  something  very  different  from  what  is  emphasized 
in  the  Productivity  Theory  or  in  the  Use  Theory.  It  is  especially 
significant  that  the  emergence  of  the  phenomenon  of  interest  seems  to 
depend  on  the  intervention  of  a  certain  interval  of  time  between 
borrowing  and  paying.  With  this  fact  in  mind  Dr.  von  Bohm-Bawerk 
has  maintained  that  the  loan  is  in  reality  an  exchange  of  present  goods 
against  future  goods. 

Present  goods  invariably  possess  a  greater  value  than  future  goods  of 
the  same  number  and  kind,  and  therefore  a  definite  sum  of  present  goods 
can,  as  a  rule,  only  be  purchased  by  a  larger  sum  of  future  goods.  Present 
goods  possess  an  agio  in  future  goods.  This  agio  is  interest.  It  is  not  a 
separate  equivalent  for  a  separate  and  durable  use  of  the  loaned  goods,  for 
that  is  inconceivable;  it  is  a  part  equivalent  of  the  loaned  sum,  kept  sepa- 
rate for  practical  reasons.  The  replacement  of  the  capital  +  the  interest 
constitutes  the  full  equivalent.' 

Bohm-Bawerk  explains  that  the  universal  preference  for  present 
goods  as  contrasted  with  future  goods  is  due  to  the  following  circum- 

'  E.  von  Bohm-Bawerk,  Capital  and  Interest  (Smart's  translation),  p.  259. 


INTEREST  771 

stances:  (i)  Future  goods  are  perceived  with  greater  difficulty  and 
furnish  less  compelling  motives  for  action  than  goods  which  are 
immediately  at  hand;  (2)  present  goods  are  relatively  scarcer  than 
future  goods;  (3)  present  goods  have  a  "technical  superiority"  over 
future  goods  in  the  productive  process.  This  is  due  to  the  fact  that 
the  longer  processes  of  production  characteristically  give  a  greater 
return  from  a  given  combination  of  labor  and  capital.  Hence  present 
goods  are  superior  in  industry  and  easily  command  a  premium. 

Dr.  Bohm-Bawerk's  theory  of  Interest,  then,  is  an  expansion  of  an  idea 
thrown  out  by  Jevons  but  not  applied.  "The  single  and  all-important 
function  of  capital,"  said  Jevons,  "is  to  enable  the  laborer  to  await  the 
result  of  any  long-lasting  work — to  put  an  interval  between  the  beginning 
and  the  end  of  an  enterprise."  Capital,  in  other  words,  provides  an  indis- 
pensable condition  of  fruitful  labor  in  affording  the  laborer  time  to  employ 
lengthy  methods  of  production.' 

Professor  Fisher,  while  accepting  the  Agio  Theory  in  the  main,  has 
modified  Bohm-Bawerk's  explanation  by  omitting  the  concept  of 
"technical  superiority,"  which  he  beUeves  not  to  be  present,  from 
the  list  of  causes  of  the  preference  for  present  goods,  and  by  further 
developing  the  psychological  efifect  of  the  individual's  income-stream.* 

The  essence  of  interest  is  impatience,  the  desire  to  obtain  gratifications 
earlier  than  we  can  get  them,  the  preference  for  present  over  future  goods. 
It  is  a  fundamental  attribute  of  hiunan  nature;  and  as  long  as  it  exists,  so 
long  will  there  be  a  rate  of  interest. 

Interest  is,  as  it  were,  human  impatience  crystallized  into  a  market 
rate.  The  market  rate  of  interest  is  formed  out  of  the  various  degrees  or 
rates  of  impatience  in  the  minds  of  different  people.  The  rate  of  impatience 
in  any  individual's  mind  is  his  preference  for  an  additional  dollar,  or 
one  dollar's  worth  of  goods,  available  today,  over  an  additional  dollar,  or 
dollar's  worth  of  goods,  available  a  year  from  today.  In  other  words,  it  is 
the  excess  of  the  marginal  desirability  of  today's  goods  over  the  marginal 
desirability  of  next  year's  goods  viewed  from  today's  standpoint.  It  can 
be  expressed  in  numbers  as  the  premium  that  a  man  is  willing  to  pay  for 
this  year's  over  next  year's  goods.  If,  for  instance,  in  order  to  get  $1  today 
he  is  willing  to  promise  to  pay  $1.05  next  year,  then  his  rate  or  degree  of 
impatience  is  said  to  be  five  per  cent.  The  present  $1  is  worth  to  him 
so  much  that  in  order  to  get  it  he  is  willing  to  pay  for  it  five  per  cent  more 
than  $1  in  the  future.' 

'  Smart,  op.  cit.,  p.  xx. 
■     » "A  flow  of  services  through  a  period  of  time  is  called  income."    Irving  Fisher, 
The  Nature  of  Capital  and  Income,  p.  52.    The  Macmillan  Co.,  1906, 

J  Irving  Fisher,  Elementary  Principles  of  Economics,  pp.  371-72.  The  Mac- 
millan Co.,  1912. 


772  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  degree  of  impatience  depends,  in  the  first  place,  upon  the 
personal  characteristics  of  the  individual;  upon  his  foresight,  self- 
control,  habit,  expectation  of  life,  and  love  of  posterity.  In  the  second 
place  it  depends  upon  his 

whole  future  stream  of  satisfactions,  i.e.,  what  we  call  his  final  enjoyable 
income.  It  will  depend  on  three  chief  characteristics  of  that  income:  first, 
as  just  said,  it  will  depend  on  its  distribution  in  time,  i.e.,  the  relative 
abundance  of  his  immediate  as  compared  with  his  remote  satisfactions; 
secondly,  on  the  amount  of  the  income,  i.e.,  whether  his  satisfactions  are, 
as  a  whole,  scant  or  abundant;  thirdly,  on  the  uncertainties  of  the  income, 
i.e.,  to  what  extent  his  satisfactions  throughout  future  years  are  subject  to 
chance,  that  is,  may  turn  out  to  be  greater  or  less  than  he  first  expected.' 

Obviously  the  degree  of  preference  will  vary  from  individual  to 
individual.  Hence  it  is  necessary  to  show  how  these  many  divergent 
rates  of  preference  bring  about  a  current  interest  rate.  If  we  assume 
a  perfect  loan-  and  investment-market  in  which  all  risk,  both  in 
respect  to  the  certainty  of  the  expected  income-streams  of  the  various 
individuals,  and  in  respect  to  the  certainty  of  repayment  of  loans, 
is  eliminated,  the  rates  become  equalized  in  the  following  manner: 

If  any  particular  individual  has  a  rate  of  impatience  above  the  market 
rate,  he  will  sell  some  of  his  surplus  future  income  to  obtain  (i.e.,  "borrow") 
an  addition  to  his  present  meager  income.  This  will  have  the  effect  of 
decreasing  the  desirability  of  his  present  income  and  increasing  the  desir- 
ability of  the  remaining  future  income.  The  process  will  continue  until  the 
rate  of  impatience  of  this  individual  is  equal  to  the  rate  of  interest.  In 
other  words,  a  person  whose  impatience  rate  exceeds  the  current  rate  of 
interest  will  borrow  up  to  the  point  at  which  the  two  rates  will  be  equal. 
Reversely,  a  man  who,  with  a  given  income-stream,  has  a  rate  of  impatience 
below  the  market  rate,  will  sell  (i.e.,  "lend")  some  of  his  abundant  present 
income  to  eke  out  the  future,  the  effect  being  to  increase  his  rate  of  im- 
patience until  it  also  harmonizes  with  the  rate  of  interest.' 

It  should  be  noted  [however]  that  borrowing  and  lending  are  not  the 
only  ways  in  which  one's  income-stream  may  be  modified.  The  same  result 
may  be  accomplished  simply  by  buying  and  selling  property;  for,  since 
property  rights  are  merely  rights  to  particular  income-streams,  their 
exchange  substitutes  one  such  stream  for  another  of  equal  value  but  differ- 
ing in  distribution  in  time,  or  certainty.^ 

We  have  seen  that  from  the  standpoint  of  the  individual,  when  a  rate 
of  interest  is  given,  he  will  adjust  his  rate  of  impatience  to  correspond  with 
that  rate  of  interest. 

'  Fisher,  Elementary  Principles  of  Economics,  p.  379. 
» Ibid.,  p.  390.  J  Ibid.,  p.  394. 


INTEREST  773 

For  him  the  rate  of  interest  is  a  relatively  fixed  fact,  since  his  own  rate 
of  impatience  and  resulting  action  can  affect  it  only  infinitesimally.  All  he 
can  do  is  to  adjust  his  rate  of  impatience  to  the  rate  of  interest  as  he  finds  it. 
For  society  as  a  whole,  however,  these  rates  of  impatience  determine  the 
rate  of  interest.' 

Thus  the  rate  of  interest  is  the  common  market  rate  of  impatience  for 
income,  as  determined  by  the  supply  and  demand  of  present  and  future 
income.  Those  who  are  very  impatient  strive  to  acquire  more  present 
income  at  the  cost  of  future  income,  and  tend  to  raise  the  rate  of  interest. 
These  are  the  borrowers,  the  spenders,  the  buyers  of  goods  which  aflford 
immediate  gratification,  the  sellers  of  property  yielding  remote  income, 
such  as  bonds  and  stocks.  On  the  other  hand,  those  who — being  relatively 
patient — strive  to  acquire  more  future  income  at  the  cost  of  present 
income,  tend  to  lower  the  rate  of  interest.  These  are  the  lenders,  the 
savers,  the  investors.* 

218.    INTEREST  RATES3 

The  published  rates  on  money  loaned  on  the  New  York  market 
include  two  sets  of  quotations  under  the  head  "Call  Loans,"  namely, 
call  loans  at  the  stock  exchange  and  at  banks  and  trust  companies; 
seven  under  the  head  "Time  Loans,"  namely,  30-,  60-,  and  90-day, 
and  4-,  5-,  6-,  and  7-month;  and  three  under  the  head  "Commercial 
Paper,"  namely,  double  name,  choice  60-  to  90-days,  and  two  varieties 
of  single  name,  prime  4-  to  6-months,  and  good  4-  to  6-months.  In 
the  weekly  summaries  contained  in  the  Commercial  and  Financial 
Chronicle  the  minimum  and  maximum  quotations  for  each  class  of 
loans  are  given,  and,  in  the  case  of  call  loans  at  the  stock  exchange,  the 
weekly  average  in  addition.  A  comparison  of  these  quotations  reveals 
some  interesting  facts. 

The  call-loan  rate  at  the  stock  exchange  differs  from  that  charged 
at  the  same  time  at  banks  and  trust  companies,  both  in  magnitude 
and  range.  During  the  last  eleven  years  its  minimum  has  ordinarily 
been  below  that  at  banks  and  trust  companies  by  amounts  varying 
from  I  per  cent  to  6  per  cent,  but  most  frequently  by  5  per  cent. 
During  72  weeks  of  the  period  the  minimum  quotations  at  both  places 
were  identical.  The  average  rate  at  the  stock  exchange  during  the 
same  period  was  above  the  minimum  at  banks  and  trust  companies  by 
amounts  varying  from  |  per  cent  to  34  per  cent  but  most  frequently 

'  Ihid.,  p.  398.  •  » Ibid.,  p.  399. 

*  Adapted  from  W.  A.  Scott,  "Rates  on  the  New  York  Money  Market  1896- 
'906,"  in  The  Journal  of  Political  Economy,  XVI,  273-98  ^May,  1908). 


774  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

by  I  per  cent.  These  two  quotations  were  identical  during  138  of  the 
572  weeks  under  investigation.  The  range  of  rates  at  the  stock 
exchange  is  much  greater  than  at  banks  and  trust  companies,  being 
most  frequently  between  i  per  cent  and  25  per  cent,  while  at  banks 
and  trust  companies  it  was  zero  during  339  of  the  572  weeks  of  the 
period,  and  less  than  i  per  cent  during  470  weeks.  In  spite  of  these 
differences,  however,  the  fluctuations  of  the  rates  at  both  places  are 
in  general  the  same,  those  at  banks  and  trust  companies  changing  less 
frequently  and  within  a  narrower  range,  but  nevertheless  following 
faithfully  all  the  more  important  movements  of  the  stock-exchange 
rate. 

The  five  varieties  of  time  loans  quoted  regularly*  also  often  differ 
from  each  other  in  magnitude  and  range.  A  comparison  of  the 
minimum  quotations  for  the  last  eleven  years  reveals  the  general  rule 
that  the  rate  tends  to  rise  as  the  length  of  the  loan  increases,  but  to 
this  rule  there  are  many  exceptions.  For  example,  in  1 26  weeks  of  the 
period  the  minimum  rates  were  identical  for  all  classes  of  time  loans. 
The  90-day  and  60-day  minimum  rates  were  identical  in  308  weeks, 
.the  4-months  and  90-day  in  320  weeks,  the  5-months  and  4-months  in 
374  weeks,  the  6-months  and  5-months  in  501  weeks. 

The  difference  between  these  quotations  rarely  exceeds  ^  per  cent, 
and  the  general  rule  seems  to  be  that  the  influence  of  time  in  raising 
the  rate  grows  less  as  the  length  of  the  loan  increases.  For  example, 
there  is  apt  to  be  a  greater  difference  between  the  quotations  of  60- 
and  90-day  paper  than  between  90-day  and  4-months.  Likewise, 
there  is  a  greater  difference  between  90-day  and  4-months  than 
between  4-months  and  5-months  paper. 

The  range  of  time  loans  is  much  less  than  that  of  call  loans,  being 
rarely  above  ^  per  cent  in  a  given  week,  and  on  all  classes  being  zero 
during  the  great  majority  of  the  572  weeks  investigated.  The 
tendency  for  the  rate  to  vary  during  the  week  grows  stronger  as  the 
period  of  the  loan  increases.  In  the  case  of  60-day  loans,  for  example, 
there  were  variations  in  only  162  of  the  572  weeks,  while  in  that  of 
90-day  loans  there  were  variations  in  190  weeks,  and  in  that  of 
4-months  loans,  in  238  weeks. 

During  the  greater  part  of  the  last  eleven  years  the  rates  on  all 
classes  of  time  loans  have  averaged  higher  than  those  on  call  loans. 

» Sixty-  and  90-day  and  4-,  5-,  and  6-months.  Thirty-day  and  7-montlis 
paper  is  frequently,  but  not  always  quoted,  and  it  was  therefore  omitted  from  the 
calculation. 


INTEREST 


775 


This  was  true  of  the  annual  averages  of  these  rates  for  seven  of  the 
eleven  years  and  of  the  monthly  averages  for  86  of  the  132  months  of 
the  period.  The  exceptions  to  this  rule,  however,  are  important,  and 
to  their  significance  I  shall  refer  a  little  later. 

A  comparison  of  the  quotations  on  commercial  paper  reveals  the 
same  kind  of  differences  that  are  noted  in  the  case  of  call  and  time 
loans.  The  minimum  rate  on  double-name  paper  is  usually  below 
that  on  single-name,  but  during  254  of  the  572  weeks  of  the  period  it 
was  identical  with  that  on  prime  single-name  paper.  The  difference, 
when  one  exists,  is  usually  j  per  cent.    The  range  for  single-name 

Monthly  Averages  of  Typical  Rates  foe  the  Period  1896-1906 


% 


a. 
< 


c 

3 


O, 


o 


> 
o 


4) 


^:7_\s ^_/ 

c/  s:  1 


A=  Commercial  paper,  double  name  6o-day. 
B"=  60-day  time. 
C"=  CaU  loan. 

paper  is  usually  greater  than  for  double-name  and  the  fluctuations  are 
more  frequent.  As  compared  with  the  rates  on  time  loans,  running 
for  the  same  period,  that  on  commercial  paper,  as  a  rule,  averages 
higher.  The  exceptions  to  this  rule  correspond  in  time  to  those  men- 
tioned above  in  which  the  call-loan  rate  averaged  above  that  on 
60-day  time. 

A  study  of  the  monthly,  as  distinguished  from  the  annual,  averages 
clearly  reveals  certain  seasonal  fluctuations.  These  are  indicated  on 
the  above  chart,  which  represents  the  rates  for  each  month  averaged 
for  the  entire  eleven  years. 


776  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

It  will  be  observed  that  for  all  the  rates  these  eleven-year  averages 
indicate  a  decline  at  the  beginning  of  the  year,  a  rise  in  the  spring, 
another  decline  in  the  early  summer  and  a  heavy  rise  in  the  late 
summer  and  early  fall.  With  the  exception  of  the  call  rate,  which  rose 
steadily  from  September  to  the  end  of  the  year,  they  also  indicate  a 
reaction  from  the  fall  rise  in  October  and  November,  followed  by  a 
sharp  rise  in  December,  in  the  case  of  the  time  rates,  and  by  a  still 
further  decline  in  the  case  of  the  commercial-paper  rates. 

A  more  detailed  study  of  each  year  confirms  the  regularity  of  these 
seasonal  fluctuations.  For  example,  with  the  exception  of  1899,'  all 
the  rate  averages  fell  in  January  and  February  of  each  year.  To  the 
rule  of  a  spring  rise  there  were  exceptions  only  in  1896  and  1904. 
The  fall  in  rate  averages  in  the  early  summer  occurred  regularly  each 
year.  As  a  rule,  it  continued  through  May  and  June,  but  in  1901  and 
1902  the  spring  rise  in  all  the  rates  continued  into  May,  so  that  the 
June  average  alone  showed  a  fall,  and  the  same  thing  happened  to  the 
call  and  time  rates  in  1904  and  to  the  commercial-paper  rate  in  1899. 
In  1903,  in  the  case  of  all  the  rates,  the  fall  continued  through  May 
only,  the  June  average  being  higher,  and  in  1905  the  same  was  true  of 
the  call  and  time  rates. 

Regarding  the  upward  movement  m  the  late  summer  and  early  fall 
the  monthly  averages  indicate  some  irregularities.  Ordinarily  it 
began  in  July  and  continued  through  September.  Sometimes,  how- 
ever, as  in  1897,  1900,  1904,  1905,  and  1906,  the  early  summer  decline 
continued  into  July,  making  the  average  for  that  month,  in  the  case 
of  some  or  all  of  the  rates,  lower  than  in  June.  In  August  the  call 
and  time  rates  (one  or  both)  fell  in  1899,  1901,  1902,  1903,  1904,  and 
1905.  For  all  the  rates  the  upward  movement  continued  through 
October  in  1900  and  1904,  and  to  the  end  of  the  year  in  1899  and  1905. 
The  call  and  time  rates  continued  to  rise  throughout  October  in  1S96 
and  to  the  end  of  the  year  in  1904. 

The  movements  of  rates  during  the  last  quarter  of  the  year  do  not 
exhibit  the  same  degree  of  uniformity  and  regularity  as  in  the  other 
seasons.  A  reaction  from  the  high  rates  of  the  autumn  was  the  rule." 
However,  the  averages  of  none  of  the  rates  fell  in  the  last  quarter  of 
1899  or  of  1905,  and  neither  the  call-  nor  the  time-rate  averages  fell  in 

'  In  1899  the  call-rate  average  rose  in  January  and  fell  in  February,  and  the 
time  and  commercial-paper  rate  averages  fell  in  January  and  rose  in  February. 

'  It  occurred  in  eight  of  the  eleven  years  in  the  call  and  time  rates  and  in  nine 
of  the  eleven  years  in  the  commercial-paper  rate. 


INTEREST  777 

the  last  quarter  of  1903  or  of  1904.  The  average  call  rate  also  rose 
steadily  from  August  to  December  of  1900.  The  time  within  the 
quarter  at  which  this  reaction  takes  place  is  not  the  same  in  the 
different  years  and  varies  considerably  between  the  different  rates  in 
the  same  year.  Most  frequently  it  happened  in  October,  but  often  in 
November.*  In  1896  the  averages  of  all  the  rates  fell  in  November 
and  December,  the  decline  continuing  through  February  of  the  follow- 
ing year.  A  rise  in  December  occmred  in  the  average  of  the  call 
rate  each  year  except  1896,  and  in  that  of  the  time  rates  each  year 
except  1896  and  1903.  The  commercial-paper  rate  average  rose  in 
December  only  in  the  years  1890,  1902,  1904,  and  1905. 

In  the  investigation  of  the  causes  of  the  fluctuations  of  rates,  and 
the  influence  they  exert  upon  each  other,  the  average  call-loan  rate  at 
the  stock  exchange,  the  minimum  rate  on  60-day  time  loans,  and  that 
on  double-name  60-  to  90-day  commercial  paper  have  been  selected  as 
typical  each  of  its  class.  A  detailed  comparison  by  means  of  charts 
indicates  that  the  fluctuations  of  the  other  rates  in  each  class  are 
almost  identical  with  these,  and  that  the  conclusions  to  be  drawn  from 
a  study  of  these  three  will  apply  equally  well  to  the  others. 

In  all  their  principal  and  in  most  of  their  minor  fluctuations  these 
three  rates  move  together.  In  degree  of  change  the  call-loan  rate  was 
decidedly  the  champion,  the  60-day  time  rate,  as  a  rule,  occupying 
second,  and  the  commercial-paper  rate  third  place.  The  cases  in 
which  these  statements  do  not  hold  true  are  decidedly  exceptional. 
These  facts  point  clearly  to  influences  common  to  all  the  rates  as  the 
chief  causes  of  their  fluctuations. 

The  causes  of  the  rate  fluctuations  which  have  been  noted  must  be 
sought  chiefly  in  the  influences  which  have  affected  the  relations 
between  the  supply  of  and  the  demand  for  loanable  funds  on  the  New 
York  market.  The  best  available  key  to  these  influences  is  the 
surplus  reserves  of  the  Associated  Banks.  They  are  the  nearest  ap- 
proximate measure  of  the  amount  of  the  loan  fund  at  any  given  time. 

Both  the  total  money  holdings  of  the  banks  and  the  surplus 
reserves  performed  four  major  and  several  minor  fluctuations  each 
year  during  the  period  under  discussion.    They  regularly  decreased 

'  The  call-rate  average  fell  in  October  in  1898,  1901,  1902,  and  1906,  and  in 
November  in  1896,  1897,  and  1902  j  the  time-rate  averages  feU  in  October  in  1898, 
1901,  1902,  and  1906,  and  in  November  in  1896,  1897,  and  1900;  the  commercial- 
paper  rate  average  fell  in  October  in  1897,  1901,  1903,  and  1906,  and  in  November 
in  1896,  1897,  1900,  1902,  and  1904. 


778  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

from  the  beginning  of  February  to  the  end  of  the  first  week  in  April; 
increased  from  that  date  to  the  end  of  July;  decreased  again  to  the  end 
of  the  first  week  in  November,  and  then  increased  to  the  end  of 
January.  Among  the  minor  movements  the  most  important  were: 
an  increase  in  the  month  of  October;  a  fall  in  December;  and  down- 
ward movements  during  the  early  parts  of  the  summer  months. 
These  latter  were  sometimes  great  enough  approximately  to  offset  the 
effects  of  the  normal  summer  rise,  the  line  on  the  chart'  during  these 
years  waving  up  and  down  without  much  if  any  tendency  to  rise. 
Many  other  fluctuations  occurred,  but  they  do  not  exhibit  any  marked 
degree  of  regularity. 

The  causes  of  fluctuations  in  the  total  money  holdings  of  the 
Associated  Banks  are  the  movements  of  currency  to  and  from  the 
interior,  to  and  from  local  territory,  the  operations  of  our  independent 
treasury  system,  and  imports  and  exports  of  gold.  In  order  approxi- 
mately to  determine  the  relative  importance  of  these  influences,  the 
weekly  net  gains  and  losses  to  these  banks  from  each  of  these  move- 
ments were  calculated,  and  their  relative  magnitudes  compared. 
The  results  indicate  that  in  their  effect  upon  the  reserves  of  the 
Associated  Banks  the  interior  currency  movement  was  first  in  impor- 
tance, the  movement  between  the  banks  and  their  customers  in  New 
York  City  and  its  immediate  vicinity  second,  that  between  the  banks 
and  subtreasury  third,  and  that  between  the  banks  and  foreign 
countries  fourth.  The  degree  of  importance  of  each  of  these  move- 
ments is  approximately  indicated  by  the  figures  233, 153, 131,  and  49, 
representing  the  number  of  weeks  respectively  each  contributed  most 
toward  the  change  in  the  magnitude  of  the  reserves.  The  pre-eminent 
importance  of  the  internal  currency  movement  is  still  further  empha- 
sized by  the  fact  that  this  movement  also  occupied  second  place  more 
frequently  than  any  of  the  others.  Of  the  571  weeks  covered  by  the 
investigation  it  occupied  either  first  or  second  place  diuring  420  weeks, 
the  subtreasury  movement  during  298,  the  local  movement  during 
297,  and  the  external  gold  movement  during  112. 

The  accompanying  Table  HI*  indicates  the  relative  importance 
of  each  of  these  movements  for  each  month  in  the  year  during  the 
period  under  discussion.  It  shows  that  the  internal  currency  move- 
ment occupied  first  place  in  relative  importance  in  every  month 
of  the  year  except  March,  when  the  influence  of  the  subtreasury 
was  greatest;  that  the  local  movement  was  second  in  importance  in 

■  Omitted  in  this  adaptation. — IknTOES. 


INTEREST  779 

every  month  except  May,  August,  and  November,  when  the  sub- 
treasury  movement  occupied  that  place.  The  external  gold  move- 
ment was  least  important  of  the  four  in  every  month  except  May, 
when  the  local  movement  occupied  that  place. 

In  degree  of  importance  the  local  and  subtreasury  movements  do 
not  greatly  differ.  During  the  first  three  years  of  the  period  the 
subtreasury  movement  was  the  greater  of  the  two  in  magnitude,  and 
since  that  time,  every  year  without  exception,  the  local  movement  has 
been  greater. 

It  is  quite  impossible  by  statistical  or  other  processes  to  segregate 
and  measure  the  various  elements  which  together  constitute  the 
demand  for  loans.  Every  branch  of  industry,  doubtless,  contributes 
its  quota,  but  there  is  no  way  of  determining  accurately  how  large  this 
quota  is  or  precisely  how  it  affects  the  open  market  rates  here  under 
consideration.  In  the  case  of  one  of  these  elements,  however,  namely, 
the  stock-market  demand,  it  is  desirable  that  we  should  approximate 
a  measurement  as  closely  as  possible,  since  public  opinion  and  current 
discussion  apparently  agree  in  assigning  it  a  very  great,  if  not  a 
dominating,  influence  on  the  New  York  market. 

Unfortunately,  in  the  reports  of  the  Associated  Banks,  loans  are 
not  classified,  and  it  is,  therefore,  impossible  to  compare  changes  in 
rates  from  week  to  week  with  changes  in  the  magnitude  of  loans  to 
stock  exchange  operators.  We  may,  perhaps,  arrive  at  similar 
results,  however,  by  a  round-about  process. 

The  comptroller  of  the  currency  classifies  the  loans  of  the  national 
banks  of  New  York  City  for  one  date  each  year,  and  thus  enables  us 
to  determine  approximately  what  percentages  of  the  total  loans  of 
these  banks,  on  the  average,  are  subject  to  stock-market  conditions. 
We  shall  not  do  great  violence  to  truth  if  we  assume  that  these  figures 
represent  approximately  the  state  of  affairs  for  all  the  Associated 
Banks. 

If  these  figures  represent  average  conditions  throughout  the  period 
the  percentage  of  call  loans  on  stock-exchange  collateral  to  total  loans 
is  normally  in  excess  of  40,  that  of  time  loans  secured  in  the  same  way, 
in  excess  of  20,  and  that  of  the  two  classes  of  loans  combined,  in  excess 
of  60.  It  is  probably  safe  to  say,  therefore,  that,  on  the  demand  side, 
at  least  one-half  the  loans  of  the  New  York  City  banks  are  normally 
subject  to  stock-market  conditions. 

We  may  not  assimae  that  whenever  the  movement  up  or  down  of 
the  call-rate  average  corresponded  in  time  with  that  of  the  volume  of 


78o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

transactions  on  the  stock  exchange  the  latter  was  the  cause  of  the 
former.  In  46  of  the  68  months  in  which  this  was  true  the  fluctuations 
of  the  reserv^es  would  equally  well  have  explained  the  movements  of 
the  call  rate.  The  true  interpretation  of  these  statistics  would  seem 
rather  to  be  that  the  demand  for  loans  on  the  stock  exchange  at  all 
times  constitutes  a  large  percentage'  of  the  total  demand,  but  that 
about  half  of  the  time  its  influence  on  rates  is  more  than  covmter- 
balanced  by  other  influences;  that  in  about  two- thirds  of  the  instances 
in  which  the  call  rates  move  in  the  direction  indicated  by  the  stock 
market  demand,  the  reserves  have  contributed  to  the  movement 
in  at  least  an  equal  degree;  and  that  only  occasionally,  according  to 
the  above  statistics  in  22  of  the  132  months,  has  this  demand 
actually  determined  the  direction  of  the  rate  movement. 

In  order  to  do  complete  justice  to  the  influence  of  the  New  York 
Stock  Exchange  on  rates,  account  must  be  taken  of  the  intensity  as 
well  as  of  the  magnitude  of  the  demand  for  loans  which  it  occasions. 
Many  times  during  the  last  eleven  years,  when  banks  have  been 
obliged  to  call  their  loans,  the  needs  of  stock  brokers  have  been  so 
pressing  as  to  force  rates  to  very  great  heights.*  These  occasions  have 
usually,  though  not  always,  been  marked  by  excessive  acti\ity  on  the 
exchange,  but  the  magnitude  of  the  change  in  rates  in  such  cases  was 
greatly  in  excess  of  what  the  sales  would  normally  have  produced. 
The  initial  cause  of  the  change  in  rates  in  these  cases  has  been  quite 
as  often  off  as  on  the  stock  exchange.  For  example,  the  call  of  loans 
in  the  latter  part  of  October  and  the  early  part  of  November,  1896, 
was  caused  by  a  money  stringency  produced  by  the  free-silver  agita- 
tion just  preceding  the  presidential  election  of  that  year.  The  initial 
movement  toward  high  rates  in  December,  1905,  and  in  January, 
April,  September,  and  December,  1906,  came  from  the  supply  rather 
than  the  demand  side  of  the  market.  On  the  other  hand,  the  initial 
cause  of  the  rate  movements  in  December,  1899,  and  May,  1901,  was 

■  It  will  not,  of  course,  do  to  assume  that  all  loans  on  stock-exchange  collateral 
are  made  by  operators  on  the  stock  exchange  and  that  the  funds  thus  borrowed  are 
used  in  the  purchase  of  stocks.  In  the  light  of  the  above  statistics,  however,  it  is 
probably  safe  to  assume  that  a  large  percentage  of  such  loans  are  so  used. 

*The  call  rate  rose  to  127  per  cent  on  October  29,  1896;  to  96  per  cent  on 
November  2,  1896;  to  186  per  cent  on  December  18,  1899;  to  75  per  cent  on  May 
9,  1901;  to  125  per  cent  on  December  28,  1905;  in  1906  to  60  per  cent  on  January 
2,  to  30  per  cent  on  April  5  and  6;  to  40  per  cent  on  September  5,  and  to  45  per 
cent  on  December  31. 


INTEREST  781 

Stock-market  panics.  In  all  these  cases,  however,  the  excessive 
height  of  the  rates  must  be  attributed  to  the  high  pressure  to  which 
stock-market  operators  were  subjected. 

The  element  of  risk  is  always  operative  on  the  New  York  market 
and  must  be  considered  in  the  explanation  of  rates.  It  is  doubtless 
mainly  responsible  for  the  difference  between  the  rates  on  60-day, 
double-name,  choice  commercial  paper,  and  those  on  60-day  loans 
secured  by  stock-exchange  collateral;  also  for  the  difference  in  the 
rates  on  double- name  and  single-name  commercial  paper;  but  at  times 
it  is  also  a  factor  in  individual  and  general  rate  movements.  Such 
events  as  proposed  and  actual  changes  in  the  standard  of  value  or 
other  elements  of  the  currency,  special  financial  operations  of  the 
government,  wars  and  rumors  of  wars,  presidential  elections,  etc., 
change  the  scope  and  magnitude  of  its  influence  and  cause  fluctuations 
in  rates  not  warranted  by  the  condition  of  the  reserves  or  other 
influences.  The  success  of  the  government  loan  for  the  replenishment 
of  the  gold  reserve,  in  February,  1896,  showed  itself  in  a  lowering 
of  the  rates  in  the  call  and  time  markets  at  a  time  when  the  surplus 
reserves  were  rapidly  falling.  The  presidential  election  in  November 
of  the  same  year,  in  which  the  question  of  the  standard  of  value  was  at 
stake,  raised  rates  to  a  great  height  in  the  week  preceding  the  election 
and  lowered  them  greatly  in  the  week  following,  quite  regardless  of 
the  course  of  the  surplus  reserves,  which  in  both  weeks  would  have 
warranted  movements  exactly  contrary  to  those  which  actually  took 
place.  The  presidential  election  of  1900  also  affected  the  money 
market.  The  rate  on  call  loans  advanced  to  25  per  cent  just  before 
the  election,  and  after  the  result  was  known  the  offerings  of  hoarded 
money  were  so  great  as  to  lower  considerably  the  average  rate  for 
commercial  paper  for  the  week  ending  November  9,  notwithstanding 
the  fact  that  the  average  of  the  surplus  reserves  for  that  week  was 
considerably  lower  than  in  the  one  preceding.  During  the  weeks 
ending  April  16  and  23,'  1898,  the  fluctuations  of  rates  were  due  to  the 
excitement  and  apprehension  caused  by  the  preceding  events  and  the 
outbreak  of  the  Spanish  War.  Whenever  stock-market  values  are 
fluctuating  widely,  banks  not  only  demand  larger  margins  and  are  more 

•  The  week  ending  April  16  the  average  for  call  loans  rose  from  if  to  2}  per  cent 
in  spite  of  an  increase  in  the  surplus  reserves,  and  the  following  week  both  the  time 
and  commercial-paper  rates  rose,  even  though  the  surplus  reserves  advanced  to  a 
considerably  higher  figure. 


7^2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

discriminating  in  the  selection  of  collateral,  but  they  often  also  raise 
rates  on  this  class  of  loans.  Every  stock-market  flurry  of  the  last 
decade  furnishes  examples. 

Besides  the  various  influences  comprehended  under  the  terms 
supply,  demand,  and  risk,  it  is  possible  that  at  times  a  monopolistic 
element  has  entered  the  market.  The  great  height  attained  by  the 
call  rate  in  periods  of  extreme  stringency  seems  to  point  to  tlie  presence 
of  this  element.  When  the  majority  of  the  banks  have  practically 
withdrawn  from  the  market,  it  is  possible  for  the  few  individuals, 
corporations,  and  financial  institutions  still  remaining  to  resort  to  a 
close  approximation  to  holdup  processes,  thus  forcing  the  rate  to 
unreasonable  heights. 

A  further  continuation  of  the  analysis  of  the  causes  of  rate 
movements  would  unduly  extend  this  article.  What  has  already 
been  presented  seems  adequate  support  for  the  following  statements: 

1.  Fluctuations  of  rates  on  the  New  York  market  are  wide  and 
frequent,  and  tend  to  become  more  and  more  severe. 

2.  In  a  large  measure  they  are  due  to  currency  movements,  that 
to  and  from  the  interior  being  especially  important. 

3.  Some  of  these  currency  movements  occur  with  a  considerable 
degree  of  regularity  and  are,  therefore,  capable  of  being  foreseen  and 
provided  for;  others,  and  these  are  frequently  very  important,  are 
very  irregular  and  uncertain  and  therefore  cannot  be  foreseen  and 
provided  for. 

4.  The  influences  to  which  rates  are  subject  are  varied  and 
numerous.  No  single  one  can  be  regarded  as  dominant  in  the  sense 
that  at  all  times  and  normally  it  overshadows  all  the  others. 

5.  Many  of  these  influences  are  national  and  even  international 
in  scope,  and  therefore  justify  the  application  to  the  New  York 
market  of  the  adjective  national,  and  warn  against  an  apparently 
widespread  belief  that  its  ups  and  downs  do  not  concern  the  entire 
country. 

6.  The  currency  situation  revealed  by  the  movements  outlined  and 
illustrated  in  the  preceding  pages  calls  for  serious  consideration  from 
Congress  and  amply  justifies  the  persistent  demand  for  thoroughgoing 
reform. 


INTEREST  783 

219.    CONDITIONS  IN  THE  MONEY  MARKET 

The  money  situation  continues  remarkably  easy  in  view  of  the 
comparatively  limited  reserves  held  by  the  banks.*  This  condition 
may,  of  course,  be  ascribed  to  the  absence  of  demand  by  new  enter- 
prises and  to  the  general  slowing  down  of  business  resulting  from  the 
radical  reductions  that  are  contemplated  in  the  new  tariff  schedules. 
Importers  are  requiring  smaller  accommodation,  there  is  virtually  no 
Stock  Exchange  speculation  of  any  kind  that  requires  financing,  and 
general  business  seems  to  be  gradually  approaching  a  position  where 
it  is  concerned  merely  with  the  day  to  day  requirements  of  consumers. 

Notwithstanding  that  $4,000,000  in  gold  for  export  must  be  taken 
into  consideration  in  the  money  movement  of  the  week,  the  bank 
statement  to  be  issued  after  the  close  of  business  to-day  promises 
to  be  a  fairly  favorable  one.  In  the  direct  movement  from  the 
interior  a  net  gain  of  $9,062,000  was  shown  by  the  New  York  banks. 
But  from  this  must  be  deducted  the  $4,000,000  and  a  net  loss  of 
$387,000  on  Sub-Treasury  business,  which  brings  the  net  gain  down 
to  $4,675,000. 

A  rather  significant  indication  of  the  real  condition  of  the  money 
market  at  present^  is  the  fact  that  sixty-day  funds  are  quoted  at 
3^  @  3f  per  cent,  while  six  months  are  4f  per  cent,  and  still  higher 
figures  are  quoted  for  more  distant  maturities.  In  other  words, 
money  in  New  York  is  apt  to  continue  easy  until  crop  requirements 
become  insistent.  Then  if  there  should  be  any  improvement  in 
trade  following  the  definite  promulgation  of  the  tariff  and  should 
Stock  Exchange  speculation  assume  even  normal  proportions,  bankers 
at  New  York  expect  that  a  period  of  distinct  stringency  will  prevail 
and  they  are  governing  their  transactions  and  credit  accordingly. 
An  equally  significant  feature  in  the  last  few  days  has  been  the  sale 
in  this  market  of  quite  large  amounts  of  sterling  finance  bills.  This 
is  a  form  of  foreign  borrowing  and  means  that  foreign  funds  are  being 
loaned  here  on  long  term  commitments.  This,  of  course,  will  be  a 
counteractive  influence  of  the  recent  exportation  of  gold. 

Preliminary  estimates  in  regard  to  the  movements  of  currency 
this  week  suggest  a  gain  in  cash  by  the  banks  of  about  $5,300,000. 
They  received  from  the  interior  $19,085,000  and  sent  to  the  interior 

'  From  The  Journal  oj  Commerce  and  Commercial  Bulletin,  May  17,  1913. 
» Ihid.,  May  24,  10 13. 


784 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


$8,293,000,  including  $4,858,000  national  bank  notes  sent  to  Washing- 
ton for  redemption.  The  gain  from  the  interior  was  $10,792,000. 
Gold  exports  amounted  to  $2,000,000  in  bars  to  Paris.  The  ordinary 
disbursements  by  the  Sub-Treasury  aggregated  $11,343,000.  The 
payments  by  the  banks  to  the  Sub-Treasury  were  $14,779,000,  show- 
ing a  loss  on  Sub-Treasury  operations  proper  of  $3,436,000. 

OfTerings  of  money  on  call  showed  an  increase  yesterday,  which 
was  reflected  in  the  fact  that  renewals  were  made  at  2f  per  cent,  as 
against  2|  per  cent  on  the  previous  day.  The  extreme  quotations 
were  2^  and  3  per  cent.  The  opening  and  closing  figure  was  2^  per 
cent. 

Time  money,  however,  was  firmer  for  the  long  periods.  All  the 
banks  and  trust  companies  were  insisting  on  4^  per  cent  for  five 
months  and  4f  per  cent  for  six  months. 

Commercial  paper  presented  no  new  feature.  Transactions  were 
again  on  a  small  scale  at  rates  previously  current. 

At  Boston  there  was  considerable  marking  down  of  call  money 
rates  from  3I  to  3  per  cent. 

At  Chicago  easier  money  rates  are  regarded  as  temporary.  Trust 
companies  continue  to  loan  on  September  and  October  maturities. 
Long-time  loans  are  firm  at  5^  to  6  per  cent. 

Following  are  the  quotations  covering  call  and  time  loans  and 
commercial  paper  for  the  periods  named: 


Yesterday 


Last  Week 


Last  Year 


Call  money — 

Renewals 

Range 

Time  money — 

Sixty  days 

Ninety  days 

Four  months 

Five  months 

Six  months 

Commercial  paper — 

Choice  6  months  names 


2f 


35@3i 

4 
__      4 
4i@4i 
4^@4l 


3f 
3l 


5i@si 


2! 


2^@2| 


3 


@4i 


4 

4 

4 

4i@4i 

4^@4J 


4i 


5i@5^ 


2! 

2f@3 


3 

3 
3i 


@3i 


3i@35 
3l@4 


INTEREST  78s 

220.    DIFFERENCES  IN  RATES  OF  INTEREST  ON  PUBLIC 

LOANS 

a)   DIFFERENT  AVERAGE   RATES   OF  INTEREST   ON   INDEBTEDNESS   OF 

STATES,   COUNTIES,   AND  MINOR   CIVIL  DIVISIONS  BY 

GROUPS   OF   STATES,   I902' 

Per  cent 

8 

o 
6 

8 

7 
o 
I 
9 
4 
I 
o 


Me.,  N.H.,  Vt.,  Mass.,  R.I.,  Conn 3 

N.Y.,  N.J.,  Pa 4 

Del.,  Ind.,  Va.,  W.  Va 4 

N.C.,  S.C,  Ga.,  Fla 5 

Ohio,  Ind.,  111.,  Wis.,  Mich 4 

Minn.,  la..  Mo.,  N.D.,  S.D.,  Neb.,  Kan 5 

Ky.,  Tenn.,  Ala.,  Miss 5 

La.,  Ark.,  I.T.,  Okla.,  Tex 4 

Mont.,  Idaho,  Wyo.,  Colo.,  N.M 5 

Ariz.,  Utah,  Nev 6 

Wash.,  Ore.,  Cal 5 


6)   DIFFERENT  RATES  OF   INTEREST   ON  DEBT   OF   VARIOUS   COUNTRIES* 

Per  cent 

Argentina 4-6 

Austria-Hungary 3-5 

Brazil 4-5 

Canada 25-4 

China 4-5 

Ecuador 4-10 

France 2I-3 

German  Empire 3-4 

Italy 3-5 

Japan 4-5 

Mexico 3-5 

Netherlands 2^3 

Norway 3-3^ 

Paraguay 3-7 

Russia 3-6 

Siam 4^ 

United  Kingdom 25-2J 

United  States 2  -4 

'  Special  Report  of  the  United  States  Census  Office,  Wealth,  Debt,  and  Taxation 
(1907),  p.  143- 

*  Statistical  Abstract  of  the  United  States,  1912,  pp.  804-805. 


786 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 
221.    TABLE  OF  BOND  VALUES' 


COMPUTED  FOR    SECURITIES    BEARING   INTEREST   AT   5  PER  CENT 

ON   PAR  VALUE 


Years 

BEFOKE 

Maturity 


1. . . . 
2. . . . 

i 

4 

5 

6 

7 

8 

9 

10. . . . 
II. . . . 
12. . . . 

13 

14 

IS 

16 

17 

18 

ig 

20 ... . 

as 

30 

35 

40 

4S 

50 


Equivalent  Rate  of  Return 


4J% 


100 

lOO 
lOI 
lOI 

102 

102 
102 
103 
103 
103 
104 
104 
104 

loS 
105 
los 
los 
106 
106 
106 
107 
108 
108 
109 
109 
109 


4l% 


48 
9S 
39 
81 
22 
60 
97 
33 
67 
99 
30 
60I103 


100 
100 

lOI 

loi 

lOI 
lOI 

102 

102 
102 
102 
103 


103 
103 
104 
104 
104 
104 
104 
104 

105 
106 
106 
106 
107 
107 


4l% 


100 
100 
100 
100 
loi 

lOI 
lOI 
lOI 
lOI 
lOI 

102 
102 
102 
102. 
102 
102 
102 

103 
103 
103 
103 
103 

104 
104. 
104, 
104. 


4i% 


100. 
100. 

TOO, 

100, 

100. 

100, 

100. 

100 

100 

100, 

lOI  , 

lOI  , 

lOI, 

lOI. 

lOI. 

lOI  . 

lOI 

lOI. 

lOI. 

lOI. 

lOI, 

lOI. 

102. 

102. 


63 1 102 
76!  102 


5% 


100 
100 
100 
100 
100 
100 
100 
100 
100 

lOO 

100 
100 

TOO 

100, 
100 

TOO. 
100 
100 
TOO 
100. 
100, 
100 
TOO, 
lOO, 
100, 
100, 


si% 


sJ% 


49  97 


5l% 


13  »6 


5i% 


sf% 


40^94 
1694 


s\% 


s\7o 


28  99 
60*98 


6% 

99.04 
98.14 
97.29 
96.49 
9S.73 
95  02 
94 -33 
93.7a 
93.la 
92.56 
92.03 

91 -53 
91.06 
90.62 
90.  20 
89.81 

89  43 
89.08 
88. 7S 
88.44 
87.14 
86.16 
85 -44 
84.90 
84.50 
84.20 


The  figures  in  this  table  show,  as  a  percentage  of  par,  the  present 
value  of  any  5  per  cent  bond,  according  to  (i)  the  length  of  time  to 
elapse  before  repayment  of  the  principal,  and  (2)  the  equivalent  rate 
of  net  income  which  the  investment  is  to  yield. 

For  example,  a  man  wishes  to  buy  in  July,  1913,  a  $1,000  5  per 
cent  bond  maturing  in  July,  1932,  and  wishes  to  derive  from  it  a  net 
income  equivalent  to  5I  per  cent,  allowing  for  the  fact  that  he  is  to 
receive  at  the  maturity  of  the  bond  the  full  par  value,  which  is  more 
than  he  will  now  pay  for  it.  In  the  column  headed  5j  per  cent,  the 
figure  showing  the  value  19  years  before  maturity  is  97.02.  The 
proper  price  to  pay  for  the  $1,000  bond  is  therefore  $970. 20. 

'  Compiled  from  more  elaborate  tables  published  for  the  use  of  bankers  and 
investors. 


INTEREST 


787 


222.    THE  RELATION  OF  INTEREST-RATES  TO  RISING 
OR  FALLING  PRICES' 

To  what  extent  is  appreciation  of  money  balanced  by  a  lower  rate 
of  interest,  or  depreciation  of  money  by  higher  interest  ?  Only  to  a 
small  degree.  So  largely  is  the  dollar  looked  upon  as  a  settled  and 
unchangeable  standard,  so  little  is  its  variability  in  purchasing  power 
practically  considered,  despite  plentiful  evidence  of  this  variability, 
that  the  adjustment  of  interest  rates  to  the  changing  value  of  money 
seems  almost  negligible.  The  difl5culty  is  the  greater,  because,  even 
when  all  these  possibilities  are  borne  in  mind,  we  cannot  be  abso- 
lutely certain  how  or  to  what  extent  money  will  change  in  value  over 
either  a  long  or  a  short  future  period.  We  may  expect,  for  instance, 
a  continued  depreciation,  but  we  cannot  be  sure  of  it  or  of  its  extent 
and  continuance. 

In  The  Rate  of  Interest,  Professor  Fisher  has  set  forth  nimierous 
statistical  data  which  seem  to  show,  in  the  aggregate,  some  tendency 
toward  adjustment  of  interest  to  price  changes.  If  money  is  depre- 
ciating there  is  some  tendency  for  interest  to  rise,  and  if  it  is  appre- 
ciating, for  it  to  fall.  But  this  rule,  if  true  for  a  majority  of  cases,  is 
also  subject  to  numerous  exceptions.  And  even  when  there  is  adjust- 
ment, it  is  exceedingly  slight.  The  following  figures  (from  Irving 
Fisher's  The  Rate  of  Interest,  brought  down  through  1910  by  compila- 
tions from  the  Financial  Review  and  the  Economist),  giving  interest 
rates,  appreciation  and  depreciation  of  money,  and  virtual  interest 
(i.e.,  interest  realized  in  actual  piu-chasing  power),  show  to  how  small 

New  York  Rates  of  Interest  in  Relation  to  Rising  and  Falling  Prices 
Taken  from  Prime  Two-Name  6o-Day  and  qo-Day  Paper 


Yean 


1875-1879. 
1880-1884. 
1885-1891 . 
1892-1897. 
I 898-1 906 . 
1907-1910. 

1875-1896. 
1897-1910. 


Per  Cent 
Interest 


Per  Cent 

Appreciation  (+) 

or  Depreciation  ( — ) 

of  Money 


+7-9 
-1-0.6 
—0.2 
+5-6 
-3-5 
-o.s 

-1-2.6 

-2.4 


Per  Cent 
virtual  Interest 


+130 

->r  6.0 

4-  4-9 
-fio.2 

+  I.I 

+  4-4 

+  7-7 
-|-  2.2 


'  From  Harry  G.  Brown,  "Rising  Prices  and  Investments,"  in  How  to  Invest 
When  Prices  are  Rising,  pp.  4i-43-    G.  Lynn  Sumner  &  Co.,  igi a. 


788 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Bane  of  England  Rates  of  Interest  in  Relation  to  Rising 
AND  Falling  Prices 


Yean 


Per  Cent 
Interest 


Per  Cent 

Appreciation  (  +  ) 

or  Depreciation  ( — ) 

of  Money 


Per  Cent 
Virtual   Interest 


1874-1879 
1880-1887 
1888-1890 
1891-1896 
1897-1900 
1901-1906 
1907-1910 

1897-191O 


+4.3 
+3-8 
-1.4 

4-3-4 
-6.6 

-i-S 
-0.9 

-1.6 


+7-5 
+7.1 
+2.4 
-fS-9 
-3-4 
+  2.1 
+  2.8 

+  1.9 


a  degree  money  rates  of  interest  change  and  how  great,  therefore,  are 
the  diflferences  realized  in  virtual  interest  when  prices  are  rising  and 
when  they  are  falling. 


223.    THE  THEORY  OF  BOND  VALUES  DURING  A 
RISING-PRICE  ERA' 

A  bond  has  been  well  defined  as  "a  promise  to  pay  a  definite  sum 
of  money  at  a  definite  future  date,  with  interest  at  a  fixed  rate  payable 
at  stated  intervals  in  the  meantime."  The  italics  indicate  the  signifi- 
cant things  for  our  immediate  consideration.  What  we  seek  to 
know  is  the  effect  of  rising  prices  upon  fixed  sums  of  money  due  in 
the  future.     An  illustration  will  show  this  effect  most  clearly. 

Suppose  that  an  investor  pays  par  value  for  a  $1,000  bond  bear- 
ing 4  per  cent  interest.  If  during  the  following  year  prices  rise  2^ 
per  cent  (about  the  actual  compounding  annual  average  rise  for  the 
past  15  years)  the  investor  must  have  $1,025  at  the  end  of  the  year 
to  have  the  same  purchasing  power  which  his  $1,000  represented  at 
the  beginning  of  the  year.  But,  supposing  that,  at  the  end  of  the 
year,  he  can  still  get  $1,000  for  his  bond,  he  will  then  have  $1,040, 
principal  and  interest.  This  is  $40  more  money,  but  only  $ij  more 
purchasing  power  than  he  had  at  the  beginning  of  the  year.  And  this 
$15  will  not  buy  so  much  as  $15  would  have  bought  then!  Further- 
more he  probably  could  not  get  the  full  $1,000  for  his  bond.  Allow- 
ing, then,  for  his  loss  in  purchasing  power  as  to  both  principal  and 


'  From  Walter  E.  Clark,  "Bonds  as  an  Investment  When  Prices  are  Rising," 
in  How  to  Invest  When  Prices  are  Rising,  pp.  60-62.     G.  Lynn  Sumner  &  Co.,  191 2. 


INTEREST  789 

interest,  he  has  received  less  than  i\  per  cent,  instead  of  4  per  cent,  on 
his  invested  capital. 

This  simple  illustration  tells  the  whole  story.  The  principle 
involved  is  that  a  general  rise  in  prices  lowers  the  real  income  of  those 
whose  income  in  dollars  and  cents  is  fixed.  It  must  be  emphasized 
that  this  principle  apphes  as  much  to  the  whole  sum  paid  in  the 
redemption  of  a  bond,  at  maturity,  as  it  does  to  the  periodic  simis 
paid  in  interest.  Both  kinds  of  payments  are  fixed  sums  and  there- 
fore have  decreasing  purchasing  powers  as  the  years  of  a  rising-price 
era  pass. 


XVIII.    PROFITS 

224.    WALKER'S  THEORY  OF  PROFITS* 

I  shall  now  undertake  to  show  that  profits,  the  remuneration  of 
the  entrepreneur  or  employer,  partake  largely  of  the  nature  of  rent, 
being  a  species  of  the  same  genus.  So  far  as  this  is  the  case,  profits 
do  not  form  a  part  of  the  price  of  the  products  of  industry,  and  do  not 
cause  any  diminution  of  the  wages  of  labor. 

The  successful  conduct  of  business,  under  free  and  active  com- 
petition, is  due  to  exceptional  abilities,  or  to  exceptional  opportimities. 
Whether  due  to  exceptional  abilities  or  to  exceptional  opportunities, 
my  proposition  could  be  equally  well  established,  just  as  it  makes  no 
difference  in  the  theory  of  rent  whether  a  piece  of  l^nd  owes  its  superior 
advantages  for  the  purposes  of  cultivation  to  higher  natural  fertility, 
or  to  closer  proximity  to  the  market  to  be  supplied.  Yet  it  can 
not  be  a  matter  of  indifference  to  social  philosophy,  whether  the 
power  to  command  profits  be  due  to  exceptional  abilities  or  to  excep- 
tional opportunities;  and  I  may,  therefore,  be  pardoned  for  pausing 
to  point  out  that  the  former  are  far  more  efl&cient  than  the  latter, 
in  securing  profits. 

To  justify  this  assertion  it  will  be  enough  to  refer  to  the  well- 
known  fact  that  a  great  majority  of  all  business  houses  which  have 
achieved  notable  success  have  been  founded  by  men  who  owed  almost 
nothing  to  opportunity.  On  the  other  hand,  nothing  is  more  familiar 
than  the  spectacle  of  great  houses,  deeply  founded,  which  have  enjoyed 
high  prestige,  wide  connections  and  large  accumulated  capital,  dwin- 
dling away  little  by  little,  if  not  brought  abruptly  to  their  downfall, 
under  the  successors  of  the  original  founder,  simply  because  the 
management  which  had  been  strong,  and  brave,  and  wise,  became 
commonplace,  purposeless,  timid,  and  weak.  All  this  is  so  familiar 
that  I  do  not  fear  that  any  American,  at  least,  will  question  the  asser- 
tion that  exceptional  abilities  have  far  more  to  do  with  the  successful 
conduct  of  business,  than  exceptional  opportunities. 

Inasmuch  as  it  would  make  no  difference  whether  profits  were 
due  to  exceptional  abilities  or  to  exceptional  opportunities,  while  the 

■  From  Frands  A.  Walker,  Political  Economy  (advanced  course),  pp.  236-41 
Henry  Holt  &  Co.,  1888. 

790 


PROFITS  791 

former  are,  in  fact,  much  the  more  important  factor  in  the  successful 
conduct  of  business,  I  shall,  hereafter,  for  convenience  and  simplicity, 
speak  of  profits  as  due  to  exceptional  abilities,  just  as  in  discussing 
the  question  of  the  use  of  the  land,  we  speak  of  rent  as  due  to  dif- 
ferences in  fertility,  assuming,  for  convenience  of  illustration,  all  the 
fields  under  view  to  be  in  equal  proximity  to  the  market. 

If  (i)  the  number  of  men  of  exceptional  abilities  were  suflicient  or 
more  than  sufficient  to  do  all  the  business  that  required  to  be  done, 
of  all  sorts  and  in  all  places;  if  (2)  these  men,  however  much  sur- 
passing all  other  members  of  the  industrial  society,  were  among  them- 
selves equal  in  all  respects  which  concern  the  conduct  of  business; 
and  if  (3)  this  class,  so  constituted  and  so  endowed,  were  distinguished 
from  all  not  of  their  class  so  clearly  and  conspicuously  that  no  one 
having  these  exceptional  abilities  should  fail  to  be  recognised,  and  no 
one  lacking  such  abilities  in  the  full  measure  should  esteem  himself 
capable  of  conducting  business,  or  be  so  esteemed,  for  the  purpose  of 
obtaining  credit,  we  should  have  a  situation  closely  analogous  to 
that  which  [would  be  presented  by]  the  case  of  a  community  near 
which  was  found  an  amount  of  good  land,  of  uniform  quality,  ade- 
quate, or  more  than  adequate,  to  raise  all  produce  required  for  the 
support  of  the  community. 

The  result  would  be,  either  [i]  that  this  class  would,  by  forming 
a  combination  and  scrupulously  adhering  to  its  terms  and  its  spirit, 
create  and  maintain  a  monopoly  price  for  their  services  in  conducting 
the  business  requiring  to  be  done,  which  is  so  improbable  as  to  be 
altogether  out  of  our  contemplation,  or  [2]  they  would,  by  competing 
among  themselves  for  the  amount  of  business,  bring  down  its  rate 
to  so  low  a  point  that  the  remuneration  of  each  and  every  one  of  this 
class  would  be  practically  equal  to  what  he  would  receive  if  employed 
by  another.  This,  which  we  might  call  the  "no-profits"  stage  of 
industrial  society,  corresponds  closely  to  the  "no-rent"  stage  in  the 
cultivation  of  the  soil.  The  persons  remaining  in  the  conduct  of 
business  would  earn  their  necessary  subsistence,  but  no  more.  Eco- 
nomically it  would  make  no  difference  to  them  whether  they  did  this 
as  employers  or  employed. 

In  fact,  however,  the  qualifications  for  the  conduct  of  business 
are  not  equal  throughout  all  of  a  sufficiently  numerous  class.  On  the 
contrary,  the  range  of  ability  is  almost  world-wide.  First,  we  have 
those  rarely-gifted  persons  who,  in  common  phrase,  seem  to  turn 
every  thing  they  touch  into  gold;   whose  commercial  dealings  have 


792  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  air  of  magic;  who  have  such  insight  as  almost  to  seem  to  have 
foresight;  who  are  so  resolute  and  firm  in  temper  that  apprehension 
and  alarms  and  repeated  shocks  of  disaster  never  cause  them  to  relax 
their  hold  or  change  their  course;  who  have  such  command  over 
men  that  all  with  whom  they  have  to  do  acquire  vigor  from  the  con- 
tact and  work  for  them  as  they  would  not,  perhaps  could  not,  work 
for  others. 

Next  below,  though  far  below,  we  have  that  much  larger  class  of 
men  of  business,  of  a  high  order  of  talent,  though  without  genius 
or  any  thing  savoring  of  magic,  whose  unqualified  success  is  easily 
comprehended,  even  if  it  can  not  be  imitated:  men  of  natural  mastery, 
sagacious,  prompt,  and  resolute. 

Then  we  have  the  men  who,  on  the  whole,  do  well,  or  pretty 
well,  in  business:  men  who  enjoy  a  harmonious  union  of  all  the 
qualities  of  the  entrepreneur,  though  only  in  moderate  degree,  or  in 
whom  some  defect,  mental  or  moral,  impairs  a  higher  order  of  abilities; 
men  who  are  never  masters  of  their  fortunes,  are  never  beyond  the 
imminence  of  disaster,  and  yet,  by  care  and  pains  and  diligence,  win 
no  small  profits  from  their  business,  and,  if  frugality  be  added  to 
their  other  virtues,  accumulate  in  time  large  estates. 

Lower  down  in  the  industrial  order  are  a  multitude  of  men  who 
are  found  in  the  control  of  business  enterprises  for  no  good  reason: 
men  of  checkered  fortunes,  sometimes  doing  well,  but  more  often 
ill;  some  of  them,  perhaps,  filling  a  place  that  would  not  otherwise 
be  filled,  but,  more  commonly  in  business  because  they  have  forced 
themselves  into  it  under  a  mistaken  idea  of  their  own  abilities,  perhaps 
encouraged  by  the  partiality  of  friends  who  have  been  willing  to  place 
in  their  hands  the  agencies  of  production,  or  intrust  them  with  com- 
mercial or  banking  capital.  The  industrial  careers  of  these  men  are 
not  peculiarly  happy,  though  the  degree  in  which  they  suffer  from 
the  constant  imminence  of  loss,  perhaps  of  bankruptcy,  is  very  much 
a  matter  of  temperament.  Some  take  it  extremely  hard,  and  when 
they  fall  make  no  eflfort  to  rise  again;  others  are  irrepressible  as 
Harlequin,  jumping  up,  alert  as  ever,  after  being  apparently  hanged, 
drawn,  and  quartered  by  the  common  executioner. 

Now,  in  my  view  of  the  question  of  profits,  we  find,  in  the  lower 
stratum  of  the  industrial  order  thus  rudely  and  hastily  sketched,  a 
"no-profits"  class  of  employers.  Notwithstanding  all  the  mag- 
nificent premiums  of  business  success,  the  men  of  real  business  power 
are  not  so  many  but  that  no  small  part  of  the  posts  of  industry  and 


PROFITS  793 

trade  are  filled  by  men  inadequately  qualified,  and  who,  consequently, 
have  a  very  checkered  career  and  realize  for  themselves,  taking  their 
whole  lives  together,  a  meager  compensation,  so  meager  that,  for 
purposes  of  scientific  reasoning,  we  may  treat  it  as  constituting  no 
profits  at  all.  Live  they  do,  partly  by  legitimate  toll  upon  the  business 
that  passes  through  their  hands,  partly  at  the  cost  of  their  creditors, 
with  whom  they  make  frequent  compositions,  partly  at  the  expense 
of  friends,  or  by  the  sacrifice  of  inherited  means.  This  bare  sub- 
sistence, obtained  through  so  much  of  hard  work,  of  anxiety,  and 
often  of  humiliation,  we  regard  as  that  minimum  which,  in  economics, 
we  can  treat  as  nil.  From  this  low  point  upwards,  we  measure 
profits. 

If  this  view  of  the  employing  class  be  correctly  taken,  it  appears 
that,  under  perfect  competition,  that  is,  where  the  conditions  of  a 
good  market  are  supplied,  manufacturing  profits,  for  instance,  are 
not  obtained  through  any  deduction  from  the  wages  of  mechanical 
labor;  and,  secondly,  manufacturing  profits  do  not  constitute  a  part 
of  the  price  of  manufactured  goods.  All  profits  are  drawn  from  a 
body  of  wealth  which  is  created*  by  the  exceptional  abilities  (or 
opportunities)  of  those  employers  who  receive  profits,  measured 
from  the  level  of  those  employers  who  receive  no  profits,  just  as  all 
rents  are  drawn  from  a  body  of  wealth,  which  is  created  by  the 
exceptional  fertility  (or  facilities  for  transportation  of  produce)  of 
the  rent-lands,  measured  from  the  level  of  the  no-rent  lands. 

The  price  of  manufactured  goods  of  any  particular  description 
is  determined  by  the  cost  of  production  of  that  portion  of  the  supply 
which  is  produced  at  the  greatest  disadvantage.  If  the  demand 
for  such  goods  is  so  great  as  to  require  a  certain  amount  to  be  produced 
under  the  management  and  control  of  persons  whose  efficiency  in 
organizing  and  supervising  the  forces  of  labor  and  capital  is  small, 
the  cost  of  production  of  that  portion  of  the  stock  will  be  large,  and 
the  price  will  be  correspondingly  high,  yet,  high  as  it  is,  it  will  not 
be  high  enough  to  yield  to  the  employers  of  this  grade  any  more  than 
that  scant  and  difficult  subsistence  which  we  have  taken  as  the  no- 
profits  line. 

The  price  at  which  these  goods  are  to  be  sold,  however,  will 
determine  the  price  of  the  whole  supply,  since,  in  any  one  market 

'  Professor  Alfred  Marshall  says:  "The  earnings  of  management  of  a  manu- 
facturer represent  the  value  of  the  addition  which  his  work  makes  to  the  total 
produce  of  capital  and  industry." 


794  MATERIALS  FOR  ELEMEISTTARY  ECONOMICS 

at  any  one  time,  there  is  but  one  price  for  different  portions  of  the 
same  commodity.  Hence,  whatever  the  cost  of  production  of  those 
portions  of  the  supply  which  are  produced  by  employers  of  a  higher 
industrial  grade,  they  will  command  the  same  price  as  those  portions 
which  are  produced  at  the  greatest  disadvantage.  The  difference, 
so  measured,  will  go  as  profits  to  each  individual  employer,  according 
to  his  own  success  in  production. 

Do  profits,  then,  come  out  of  wages  ?  Not  at  all.  The  employers 
of  the  lowest  industrial  grade — the  no-profits  employers,  as  we  have 
called  them — must  pay  wages  sufficient  to  hire  laborers  to  work 
under  their  direction.  These  wages  constitute  an  essential  part  of 
the  cost,  to  the  employer,  of  the  production  of  the  goods.  The  fact 
that  these  wages  are  so  high  is  the  reason  why  these  employers  are 
unable  (their  skill  and  power  in  organizing  and  energizing  labor  and 
capital  being  no  greater  than  they  are),  to  realize  any  profits  for 
themselves. 

The  employers  of  the  higher  industrial  grades  will  pay  the  same 
wages  to  their  laborers.  Why,  in  equity  or  in  economics,  should  a 
laborer  who  works  for  a  strong,  prudent  and  skillful  master,  receive 
higher  wages  than  one  whose  fortune  it  is  to  work  for  a  vacillating, 
weak  or  reckless  employer  ?  The  one  laborer  is  as  efficient  as  the 
other,  and  works  as  hard.  The  difference  in  production,  which,  in 
the  one  case  allows  rent  to  be  paid,  and  in  the  other  enables  this 
employer  to  secure  a  profit,  is  due  to  no  superiority  in  the  quality 
of  the  labor  or  the  capital  employed,  over  that  of  the  labor  and  the 
capital  employed  where  no  rents  or  no  profits  are  realized.  In  the 
one  case  it  is  due  to  the  superior  fertility  of  the  land,  or  its  greater 
facilities  for  the  transportation  of  produce;  in  the  other,  to  the 
superior  abilities  or  opportunities  of  him  who  conducts  industry. 

In  the  latter  case,  the  employer,  paying  wages  at  the  same  rate 
to  his  laborers,  and  interest,  at  the  same  rate,  to  the  capitalist,  for 
so  much  as  he  has  to  borrow,  and  selling  his  goods,  so  far  as  they  are 
of  equal  quality,  at  the  same  price  as  the  employer  who  makes  no 
profits,  is  yet  able  to  accumulate  a  clear  surplus  after  all  obligations 
are  discharged,  which  surplus  is  called  profits.  This  is  effected  by 
his  careful  study  of  the  sources  of  his  materials;  by  his  comprehen- 
sion of  the  demands  of  the  market;  by  his  steadiness  and  self-control 
in  the  presence  of  temptations  to  extravagance  or  wild  ventures; 
by  his  organizing  force  and  administrative  ability;  by  his  energy, 
economy,  and  prudence. 


PROFITS  795 

225.    THE  RISK  THEORY  OF  PROFITS* 

If  science  is  to  justify  the  popular  conception  of  profit  as  funda- 
mentally distinct  from  other  kinds  of  income,  it  must  do  so  by  point- 
ing to  something  the  undertaker  does  for  pay  which  is  rewarded  by 
neither  wages,  nor  interest,  nor  rent.   Just  such  a  peculiar  industrial 
function  of  the  undertaker  is  found  in  his  being  the  person  who 
relieves  others  of  risk.    He  it  is  who  bargains  with  the  laborer  for 
the  use  of  his  personal  efiforts,  with  the  landlord  for  the  use  of  his 
land,  and  with  the  capitalist  for  the  use  of  his  wealth.    To  all  these 
classes  of  economic  persons  he  makes  over,  or  engages  to  make  over, 
a  definite  sum  of  value  or  power  to  purchase,  and  takes  the  chance 
of  recouping  himself  out  of  the  proceeds  of  the  product  when  sold. 
In  doing  these  things,  he  evidently  renders  to  each  class  a  service 
similar  to  that  rendered  by  an  assurance  company  when  it  insures 
us  against  death,  accident,  or  loss  of  property.    Why  should  the 
undertaker  do  this?    What  is  his  inducement?    According  to  the 
view  of  his  income  held  by  Professor  Bohm-Bawerk,  these  risks  are 
assumed  for  nothing.     Sometimes  he  will  sell  his  goods  for  more  and 
sometimes  for  less;    but,  on  the  average,  the  undertaker  will  get 
back,  in  our  author's  opinion,  just  what  he  has  paid  to  the  laborer, 
the  landlord,  and  the  capitalist,  plus  his  own  wages  of  management. 
In  other  words,  all  he  secures  for  himself  is  the  job  of  "bossing"  the 
affair.    Now,  it  is  always  pleasant  to  feel  one's  self  master;  but  this 
salve  to  vanity  would  hardly  serve  as  a  sufficient  inducement  to 
practical  men  of  business.    Neither  is  it  true  that  by  working  for 
others  they  could  not  obtain  wages,  or  a  salary,  very  nearly,  or  fully, 
as  large  as  what  their  personal  efforts  are  worth  in  the  conduct  of 
their  own  business.    Indeed,  it  often  happens  that  they  think  so 
little  of  their  own  personal  efficiency  as  managers,  that  they  hire 
other  men  to  conduct  their  business,  or  part  of  it,  for  them.    But, 
even  if  it  be  granted  that  the  undertaker  can  give  himself  a  little 
better  job  than  he  could  obtain  elsewhere,  will  any  such  small  advan- 
tage afford  a  sufficient  inducement  for  undertaking  the  risks  of  busi- 
ness ?    The  supposition  is  manifestly  absurd.    But  some  such  induce- 
ment must  exist,  as  the  element  of  risk  is  inseparable  from  nearly  all 
industrial  activity.     Except  in  the  rendering  of  some  personal  services, 
in  which  production  and  consumption  are  simultaneous,  and  in  which 

» Adapted  from  Frederick  B.  Hawley,  "The  Fundamental  Error  of  'Kapital 
tmd  Kapitjdzins, "  in  The  Quarterly  Journal  of  Economics,  VL,  283-85  (April,  1892). 


796  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  producer  and  the  consumer  deal  directly  with  each  other,  and  in 
which,  therefore,  no  element  of  profit  appears,  there  cannot  be  any 
creation  of  value  from  which  the  element  of  risk  is  wholly  absent. 
And  in  the  end,  and  on  the  average,  the  final  consumers  of  the  product 
must  pay  in  enhanced  price  the  remuneration  for  the  risk  the  pro- 
ducer takes  upon  himself. 

There  is,  then,  in  all  industrial  undertakings  in  which  capital  is 
engaged,  and  in  some  also  in  which  capital  is  not  engaged,  an  element 
of  risk  which  the  final  consumer  has  to  pay  for.  And  the  reason  is 
this:  that  everybody  except  the  gambler — everybody,  that  is,  engaged 
in  industry — prefers  a  certainty  to  an  uncertainty.  To  be  relieved 
of  a  risk,  we  are  all  willing  to  pay  more  than  the  risk,  calculated  on 
the  doctrine  of  chances,  is  worth. 

226.  CLASSES  OF  RISKS  TO  CAPITAL' 

For  theoretical  purposes  the  most  significant  classification  of 
economic  risks  to  capital  is  the  division  into  static  and  dynamic 
risks.  Static  risks  are  those  which  are  inseparable  from  any  form  of 
economic  activity,  and  which  will  therefore  be  present  in  a  stationary 
society  as  much  as  in  one  that  is  either  progressive  or  retrogressive. 

They  are  connected  with  losses  caused  by  the  irregular  action  of 
the  forces  of  nature  or  the  mistakes  and  misdeeds  of  human  beings. 
According  to  the  occasion  of  the  loss,  they  may  be  further  subdivided. 
Some  are  caused  by  inanimate  forces,  as  fire,  wind,  or  water;  others 
by  the  action  of  animal  or  plant  life,  as  moth  or  mold;  others  by 
the  carelessness  either  of  the  owner  of  the  wealth  destroyed  or  of 
another  person,  which  gives  opportunity  for  the  unfavorable  action 
of  animate  or  inanimate  nature;  and  still  others  by  the  fraud  or 
violence  of  the  criminally  disposed,  seeking  to  appropriate  to  their 
own  use  wealth  which  does  not  belong  to  them.  All  these  forms  of 
loss  will  continue  while  human  life  endures,  and  uncertainty  as  to  the 
exact  time  or  amount  of  loss  to  be  anticipated  from  these  sources 
involves  also  the  existence  of  static  risk. 

Dynamic  risks  are  those  involved  in  the  possibility  of  dynamic 
changes.  Not  all  dynamic  changes,  however,  are  equally  important 
in  this  connection;   for  it  is  not  the  change  itself  which  constitutes 

'  Adapted  from  Allan  H.  Willett,  The  Economic  Theory  of  Risk  and  Insurance, 
PP-  39-43  >  48.  Columbia  University  Studies  in  History,  Economics,  and  Public 
Law,  Vol.  XIV  (1901). 


PROFITS  797 

the  risk,  but  the  uncertainty  about  the  time  or  amount  of  future 
changes.  Growth  of  population  and  increase  of  capital  take  place 
with  comparative  regularity,  and  therefore  cause  little  incidental 
loss,  except  in  so  far  as  they  may  be  necess&.ry  to  one  of  the  other 
dynamic  changes,  and  pave  the  way  for  it.  It  is  with  changes  in 
human  wants,  and  still  more  with  improvements  in  machinery  and 
organization,  that  the  greatest  amount  of  uncertainty  is  connected. 
Those  included  in  the  first  of  these  groups  originate  on  the  side  of 
consumption;  those  in  the  second,  on  that  of  production.  To  some 
extent  the  former  are  capable  of  being  anticipated  or  even  controlled, 
while  the  latter  occur  in  the  most  irregular  and  uncertain  ways,  and 
to  that  extent  there  is  greater  risk  connected  with  the  latter  than  with 
the  former.  No  one  thing  is  more  essential  for  success  in  modern 
business  than  the  ability  to  forecast  futiure  changes  in  the  desires  of 
consumers.  It  is  important  to  note  also  that  the  loss  may  result 
from  the  non-occurrence  of  an  anticipated  event,  as  well  as  from  the 
occurrence  of  one  which  was  not  anticipated;  and  that  the  special 
cost  entailed  upon  society  by  the  existence  of  risk  will  have  to  be 
borne  whether  or  not  the  uncertain  loss  actually  occurs. 

Examples  of  the  losses  caused  by  these  dynamic  changes  are  to 
be  found  on  every  hand.  The  tide  of  fashionable  travel  turns  from 
seashore  to  mourttains,  and  large  investments  of  capital  at  ocean 
resorts  lose  their  value.  Bicycles  and  automobiles  are  used  by  people 
who  formerly  wanted  horses  and  carriages,  and  the  value  of  the  latter 
declines.  An  unexpected  change  in  the  fashionable  color  leaves 
manufacturers  and  dealers  with  stocks  of  goods  which  they  are  obliged 
to  sell  at  reduced  prices.  The  effect  of  improvements  in  mechanical 
and  chemical  appliances  is  equally  obvious.  A  system  of  street  rail- 
ways operated  by  cable  was  introduced  in  a  western  city,  and  when 
its  career  of  usefulness  had  hardly  begun,  it  was  replaced  at  great 
expense  by  a  system  operated  by  electricity.  A  flouring  mill  was 
fitted  up  with  the  best  available  machinery,  and  within  a  very  short 
time  the  new  machinery  was  discarded,  and  an  improved  pattern 
introduced  at  an  expense  of  hundreds  of  thousands  of  doUars.  Every 
investment  of  capital  in  forms  whose  usefulness  is  limited  to  the 
production  of  a  specific  commodity,  is  exposed  to  the  danger  of  losing 
its  value  through  discoveries  or  inventions  which  render  it  obsolete 
and  useless. 

There  is  a  special  form  of  dynamic  risk  which  needs  to  be  pointed 
out,  both  on  account  of  the  large  part  it  plays  in  modern  industrial 


798  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

life  and  because  of  its  great  theoretical  importance.  In  a  state  of 
society  like  the  present,  in  which  wealth  is  increasing  at  a  rate  out 
of  proportion  to  the  increase  in  population,  there  is  always  a  large 
fund  of  newly  created  capital  looking  for  favorable  investment.  This 
must  be  used  either  in  increasing  the  supply  of  existing  consumption 
goods  or  in  creating  kinds  not  before  produced.  These  results  may 
be  reached  either  through  the  larger  employment  of  the  kinds  of 
capital  goods  already  in  use,  or  through  the  creation  of  new  kinds 
adapted  to  the  production  of  the  old  or  the  new  consumption  goods. 
If  the  only  investment  for  the  new  capital  were  to  be  found  in  the 
creation  of  consumption  goods  already  in  use,  by  methods  and 
machinery  now  employed,  the  rate  of  interest  would  rapidly  fall, 
and  there  would  be  little  opportunity  for  the  realization  of  profit. 
To  avoid  this  result  capital  is  continually  seeking  new  forms  of  invest- 
ment. The  simplest  device  is  to  invent  a  cheaper  method  of  creating 
a  commodity  already  in  use.  Every  improvement  of  this  kind  will 
yield  a  temporary  profit  to  the  entrepreneur  who  first  employs  it,  but 
in  the  end  it  must  result  in  a  lower  rate  of  interest  on  all  capital.  As 
a  second  resource  additional  capital  goods  of  forms  already  employed 
may  be  used  to  create  new  kinds  of  consumption  goods;  or,  finally, 
the  new  capital  may  be  embodied  in  new  kinds  of  capital  goods, 
intended  for  the  production  of  consumption  goods  not  before  created. 
If  the  new  consumption  good  produced  in  either  way  is  one  which 
men  desire,  so  that  as  a  result  of  its  production  there  is  a  net  increase 
in  the  sum  of  human  wants,  its  influence  will  be  felt  in  the  direction 
of  a  greater  willingness  of  men  to  labor,  a  consequent  greater  demand 
for  capital,  and  a  retardation  in  the  fall  in  the  rate  of  interest.  The 
introduction  of  the  new  goods  and  new  machinery  also  offers  an  oppor- 
tunity for  the  realization  of  temporary  profit  by  those  who  first 
produce  or  use  them. 

The  relation  of  risk  to  these  different  forms  of  investment  of  new 
capital  is  readily  seen.  In  the  first  case  no  uncertainty  is  involved, 
except  possibly  as  to  the  elasticity  of  the  demand  for  the  commodity 
whose  production  is  increased.  In  the  second  case  there  is  to  be 
added  uncertainty  as  to  the  technical  result,  a  form  of  uncertainty 
which  is  usually  connected  to  a  greater  or  less  extent  with  the  intro- 
duction of  any  untried  appliance  or  process.  With  the  progress  of 
physical  science,  however,  it  is  e\ddent  that  this  form  of  uncertainty 
is  being  gradually  eliminated,  and  that  in  many  cases  the  successful 
working  of  the  new  device  can  be  safely  counted  upon  in  advance. 


PROFITS  799 

There  is  still  greater  uncertainty  involved  in  the  creation  of  new  com- 
modities and  new  machinery  for  producing  them.  If  the  new  com- 
modity is  intended  to  satisfy  an  existing  need,  it  may  be  uncertain 
how  far  it  will  accomplish  its  purpose.  The  claim  that  it  meets  a 
long  felt  want  is  hardly  sufficient  to  assure  its  success.  If,  on  the 
other  hand,  the  commodity  precedes  the  want,  and  is  produced  with 
the  expectation  that  its  own  intrinsic  merits  and  extensive  advertising 
will  create  a  market  for  it,  the  possibility  of  failure  is  evidently  greatly 
increased.  Finally,  if  existing  kinds  of  capital  goods  are  used  in 
producing  a  new  commodity  which  fails  to  find  a  sale,  they  can  be 
turned  to  the  employment  for  which  similar  machines  had  been  used 
before  and  thus  preserve  a  part  of  their  value;  but  if  new  kinds  of 
machines  have  to  be  brought  into  service,  besides  the  element  of 
uncertainty  as  to  the  technical  success  of  the  machine,  there  is  a 
possibility  that  the  entire  investment  will  be  lost  if  the  commodity 
falls  dead  on  the  market. 

The  investment  of  capital  in  attempts  to  produce  new  com- 
modities which  shall  find  a  ready  sale  is  one  of  the  most  characteristic 
features  of  modern  industrial  life.  The  rapid  accumulation  of  capital, 
the  consequent  fall  of  the  rate  of  interest  in  old  forms  of  investment, 
and  the  large  gains  to  be  realized  under  our  patent  system  by  the 
creation  of  a  new  commodity  which  appeals  to  the  public  taste, 
combine  to  push  production  out  tentatively  in  all  directions.  Large 
amounts  of  capital  are  sunk  every  year  in  experiments  which  end 
disastrously,  and  large  fortunes  are  made  out  of  successful  ventures. 
In  order  to  be  able  to  refer  without  circumlocution  to  the  risk  involved 
in  these  experiments,  it  seems  best  to  give  it  a  separate  name.  For 
lack  of  a  better  term  let  us  call  it  developmental  risk.  By  that  term 
will  be  meant  the  uncertainty  as  to  the  return  to  be  realized  from  the 
investment  of  capital  in  the  production  of  a  new  commodity  or  of  a 
new  capital  good,  due  to  the  possibility  that  it  may  not  find  the 
expected  market,  or  may  not  perform  the  work  for  which  it  was 
intended. 

827.    THE  CLASSES  OF  RISK-TAKERS' 

We  have  now,  I  think,  attained  a  position  from  which  we  can 
clearly  discriminate  between  the  three  classes  of  risk-takers — enter- 
prisers, speculators,  and  gamblers.    All  of  them  are  actuated  by  the 

»  From  Frederick  B.  Hawley,  "Enterprise  and  Profit,"  in  The  Quarterly  Journal 
of  Economics,  XV,  103-4  (November,  1900). 


8oo  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

hope  of  gain,  but  differ  in  their  grounds  for  expecting  or  hoping  for 
gain.  The  entrepreneur,  who  is  only  the  assumer  of  industrial  or 
productive  risks,  when  considering  a  risk,  computes  as  well  as  he  can 
the  actual  probability  of  loss.  He  then  forms  a  subjective  valuation 
of  the  risk,  which  is,  of  course,  considerably  greater  than  the  actual 
risk.  The  difference  between  his  actuarial  and  his  subjective  valua- 
tion serves  as  the  minimum  limit  of  the  expectation  of  profit  which 
will  induce  him  to  assume  the  risk.  He  then  secures  from  the  person 
who  will  be  relieved  by  hi^  assumption  of  the  risk  as  much  as  he  can 
for  assuming  it,  the  maximum  limit  being,  of  course,  that  person's 
subjective  valuation  of  the  risk,  which  must  in  all  cases  be  greater 
than  his  own,  or  no  transaction  results.  The  competition  of  enter- 
prisers among  themselves  results,  of  course,  usually  in  the  enterpriser 
getting  but  little  more  than  his  own  subjective  valuation;  but  a  little 
more  he  does  always  get  in  the  long  run.  The  essential  point,  however 
is  that  the  enterpriser  performs  a  service  for  which  he  expects  to  receive 
a  reward — necessarily,  from  the  circumstances  of  the  case,  uncertain 
in  its  amount,  or,  in  other  words,  a  true  residue. 

The  speculator,  on  the  other  hand,  does  not  render,  or  rather  does 
not  mean  to  render,  any  service  to  anybody.  The  fact  that  a  specu- 
lator on  the  Cotton  or  Produce  Exchange  does  render  a  service  to 
society  through  the  party  he  relieves  of  the  risk  is,  as  we  have  seen, 
only  incidental.  The  speculator  on  the  Stock  Exchange,  whose 
operations  are  otherwise  similar  to  his  relieves  no  one  of  the  risk  of 
what  the  selling  price  of  the  product  will  be,  as  the  subject  matter  of 
his  speculations  is  not  products  but  aggregations  of  capital  that  pro- 
duce products.  All  that  the  pure  speculator  has  in  mind,  when  he 
assumes  a  risk,  is  to  back  his  own  opinion.  He  believes  that  the 
common  judgment  of  the  trade  about  the  real  value  of  cotton  or 
wheat  or  stocks,  as  expressed  in  the  prices  ruling  on  the  exchange,  is 
wrong,  just  as  he  may  believe  that  a  certain  horse  may  have  a  better 
chance  to  win  a  race  than  is  expressed  by  the  going  odds.  Some  of 
these  men  are  correct  in  their  estimate  of  themselves:  their  judgment 
of  cotton,  wheat,  stocks,  or  horses,  is  better  than  that  of  the  average 
man  venturing  in  these  matters.  These  men  win  largely  and  steadily, 
but  it  is  only  because  they  excel  their  fellow-speculators.  If  the 
average  was  raised  to  their  level,  they  would  have  no  advantage  in 
speculation;  and  they  would  cease  to  win  with  any  approach  to  regu- 
larity, and  in  the  long  run  would  neither  gain  nor  lose  by  their  ven- 
tures.    Speculation  is,  therefore,  merely  a  distributive  force,  and 


PROFITS  8oi 

cannot  be  brought  by  analysis  within  theories  of  the  productive 
forces. 

The  case  of  the  gambler  diflfers  from  that  of  the  speculator  only 
in  this:  that  his  subjective  valuation  of  a  risk  is  a  negative  quantity. 
The  excitement  of  risk  makes  it,  to  the  gambler,  a  good  in  itself,  so 
that,  when  he  beheves  the  chance  of  winning  or  losing  to  be  even,  he 
likes  to  take  the  chance  when  opportunity  oJGfers;  and  when  he  cannot 
find  an  even  chance  to  bet  on,  without  putting  himself  to  too  much 
trouble,  he  will  play  faro  or  some  similar  game  in  which  he  knows  that 
the  chances  are  against  him. 

228.    HEDGING  AS  AN  INSURANCE  AGAINST  RISK- 

Not  only  is  future  trading,  in  the  absence  of  definite  knowledge  by 
both  parties  that  there  is  a  mutual  intention  to  gamble,  sanctioned  by 
the  law,  but  it  is  an  important  fact  that,  notwithstanding  the  enor- 
mous amount  of  purely  speculative  operations  upon  leading  cotton 
exchanges,  the  future  trading  system  is  very  extensively  used  to 
faciHtate  transactions  in  the  actual  staple,  and  for  the  purpose,  not 
of  speculation,  but  in  large  measure  of  avoiding  speculation. 

This  employment  of  the  future  system,  which  is  technically  known 
as  "hedging,"  is  an  exceedingly  important  feature  of  modem  trading 
in  cotton,  and,  unquestionably,  an  extremely  valuable  one.  In  sub- 
stance the  process  of  hedging  is  as  follows:  A  cotton  merchant  in  the 
South  contracts  by  private  arrangement  outside  of  the  exchange,  say, 
in  July,  when  the  old  crop  is  practically  exhausted  and  before  the  new 
crop  has  matured,  to  deliver  to  a  spmner,  say,  in  New  England  or  in 
Liverpool,  10,000  bales  of  cotton  in  the  following  January  at  a  fixed 
price.  At  the  time  of  making  this  agreement  he  has  no  cotton  in  his 
possession  and  has  no  means  of  immediately  obtaining  it  in  the  market. 
Suppose  the  price  stipulated  is  8  cents  a  pound,  this  figure  representing 
the  price  at  which  the  merchant  expects  to  be  able  to  buy  the  cotton, 
plus  an  allowance  for  his  expenses  and  profit  on  the  transaction.  If 
subsequently,  owing  to  early  frosts,  serious  storm  damage,  or  any  one 
of  a  number  of  causes,  the  price  of  cotton  advances  to  10  cents  a 
pound,  the  seller  of  this  cotton  is  obviously  confronted  with  a  heavy 
loss,  since  he  must  go  into  the  market  and  buy  the  actual  cotton  at 

'  Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  Cotton 
Exchanges,  Part  I  (1908),  pp.  48-54. 

[See  also  Selection  100:  "Organized  Exchanges:  Futures,  Puts,  and  Calla^" 
and  Selection  106:  "Organized  Speculation  and  Its  Regulation." — £dixc2s.} 


Bos  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  advanced  price.     Under  the  future  system  this  loss  may  be  very 
largely  avoided  by  hedging.    To  escape  such  loss  the  seller  of  the 
10,000  bales  of  cotton,  immediately  on  entering  into  his  agreement, 
buys  on  the  exchange  a  corresponding  amount  of  future  contracts  for 
cotton  deliverable  in  January.'     For  these  contracts  let  it  be  assumed 
that  he  has  paid  7j  cents  per  pound,  or  a  half  cent  under  the  price  at 
which  he  has  undertaken  to  deliver  cotton  in  January.     This  is  a 
reasonable  assumption;  in  fact,  in  actual  practice  it  is  the  custom  for 
such  sellers  of  cotton  to  calculate  the  number  of  points  (hundredths  of 
a  cent)  necessary  to  cover  their  expenses  and  allow  them  a  profit,  and 
then  to  agree  to  deliver  cotton  to  spinners  at  such  number  of  points 
above  the  current  price  of  some  future  delivery;  that  is  to  say,  if  in 
July  exchange  contracts  for  January  delivery  are  selling  at  7^  cents*  a 
cotton  merchant  would  reckon  the  number  of  points  necessary  to  cover 
his  expenses  and  profit,  and  then  agree  to  deliver  the  cotton  to  a 
spinner  at  this  number  of  points  above,  or,  to  use  the  trade  expression, 
"  on  "  the  current  price  of  January  contracts.'     In  the  case  assumed  it 
may  be  considered  that  the  margin  thus  allowed  is  a  half-cent.    The 
merchant  has,  then,  bought  future  contracts  for  10,000  bales  of 
cotton  at  7j  cents,  and  has  agreed  to  sell  a  corresponding  quantity 
of  cotton  to  a  spinner  at  8  cents,  the  margin  of  one-half  cent  being 
intended  to  cover  his  expenses  and  leave  him  a  profit.     If  this  margin 
is  maintained  intact  he  is  satisfied.     Suppose  that  the  price  of  cotton 
in  the  spot  market  advances  sharply  to  10  cents  before  he  has  pur- 
chased the  10,000  bales  which  he  has  agreed  to  deliver  to  the  spinner 
at  8  cents.    Theoretically,  the  merchant  could  protect  himself  by 
simply  holding  his  future  contract  until  January  and  then  take  up  the 
cotton  upon  it  and  in  turn  deliver  this  cotton  to  the  spinner.     In 
practice,  however,  owing  to  the  fact  that  such  agreements  with 
spinners  are  usually  for  specified  grades,  while  future  contracts  on 
exchanges  are  not,  the  merchant  does  not  ordinarily  take  up  cotton  on 
his  future  contract;  instead,  he  goes  into  the  spot  market  and  buys 
cotton  necessary  to  meet  his  engagements  with  the  spinner,   paying 
therefor  the  advanced  price,  which  in  the  case  assumed  would  be  10 
cents.    This  cotton  he  must  deliver  to  the  spinner  at  8  cents;  conse- 

'  In  hedging  it  is  not  imperative  that  contracts  be  bought  which  mature  in  the 
same  month  that  the  actual  cotton  is  deliverable,  but  this  is  very  frequently  done. 

'  It  will  be  understood  that  prices  quoted  in  connection  with  such  contracts 
are  invariably  prices  per  pound. 

'  Allowance  must  also  be  made  for  differences  in  the  value  of  various  grades  of 
cotton. 


PROFITS  803 

quently  he  has  suffered  a  loss.  But  in  the  meantime,  under  a  normal 
working  of  the  future  system,  his  January  future  contract  which  he 
bought  on  the  exchange  at  7^  cents  should  have  likewise  advanced  by 
substantially  the  same  amount,  or  to  92  cents.  He  sells  out  his  future 
contract,  therefore,  at  a  profit  sufficient  to  offset  the  loss  suffered  on 
his  transaction  in  spot  cotton.  Even  if  it  be  assumed  that  he  receive 
cotton  on  his  future  contract  instead  of  selling  that  contract  out,  he 
should  nevertheless  be  able  to  sell  this  cotton  in  the  spot  market  at  a 
corresponding  profit,  which  would  offset  his  loss  on  spot  cotton 
purchased.  In  other  words,  his  margin  of  profit  remains  intact  and 
his  loss  on  the  actual  cotton  is  covered  by  the  profit  on  his  future 
transaction.  If,  on  the  other  hand,  the  price  of  cotton  in  the  open 
market  goes  down,  it  is  to  be  expected  that  the  price  of  future  con- 
tracts on  the  exchange  will  go  down  in  sympathy.  In  this  case  he 
will  sell  out  his  future  contract  at  a  loss,  but,  on  the  other  hand,  he 
should  be  able  to  buy  his  actual  cotton  in  the  spot  market  at  a  cor- 
respondingly lower  price  than  he  had  originally  calculated,  so  that  his 
profit  on  this  spot  transaction  will  counterbalance  his  loss  on  his 
operation  in  futures.* 

In  the  cases  described  the  hedging  process  was  resorted  to  to  pro- 
tect a  merchant  who  had  sold  cotton  ahead  at  a  time  when  it  was  not 
actually  obtainable  in  the  spot  market.  The  future  system  may  be 
used  in  a  similar  manner  to  protect  a  merchant  who  has  accumulated 
a  stock  of  cotton  for  which  he  does  not  have  an  immediate  demand. 
Assume,  for  instance,  that  a  large  cotton  merchant  in  the  South  is 
compelled  to  take  cotton  from  growers  at  the  beginning  of  the  crop 
year  in  very  large  quantities,  and  much  faster  than  he  can  dispose  of 
it  to  spinners.  This  is,  in  fact,  a  very  common  occurrence  in  actual 
practice.  Obviously,  as  his  stock  accumulates  he  is  liable  to  lose 
heavily  in  case  the  price  of  cotton  declines.  To  protect  himself  he 
again  resorts  to  the  future  market.  In  this  case,  however,  instead  of 
buying  future  contracts  he  sells  them  short.  Thus,  if  he  finds  in 
September  that  he  has  10,000  bales  of  cotton  on  hand  for  which  he 
has  paid  8  cents,  he  sells  a  corresponding  number  of  contracts  for 
delivery,  say,  in  January,  at,  say,  85  cents.*    If  owing  to  an  enormous 

'  This  statement  is  a  general  one  and  subject  to  modification  owing  to  the  fact 
that  prices  of  all  grades  of  cotton  do  not  fluctuate  in  equal  amoimt. 

*  Owing  to  the  expense  of  carrying  cotton  a  merchant  should,  unless  a  decline 
in  the  market  isenticipated,  be  able  to  sell  a  distant  contract  at  a  premium  above 
the  current  price.    This  is,  however,  by  no  means  invariably  the  case. 


8o4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

crop  or  a  poor  demand  the  price  of  cotton  in  the  open  market  goes 
down,  his  hedge  affords  him  a  double  protection.  In  the  first  place 
he  can  simply  hold  his  cotton  and  when  his  future  contracts  mature 
deliver  it  upon  them,  in  which  case  he  will,  of  course,  obtain  not  the 
reduced  price  prevailing  at  the  time  the  cotton  is  actually  delivered 
but  the  price  at  which  he  actually  sold  these  contracts,  namely,  8^ 
cents.* 

In  practice,  however,  the  merchant  does  not  usually  thus  deliver 
his  stock  of  cotton  in  fulfilment  of  future  contracts  thus  sold,  but  as 
the  season  advances  he  sells  out  his  actual  cotton  even  though  at  a 
lower  price.  Let  it  be  assumed  in  the  case  under  consideration  that 
he  sells  his  stock  of  10,000  bales  at  7  cents,  or  at  i  cent  less  than  it 
originally  cost  him ;  he  has  then  lost  i  cent  a  pound,  not  taking  into 
account  carrying  charges  which  have  accrued  in  the  meantime.  To 
offset  this  loss  he  should  be  able  to  buy  future  contracts  on  the 
exchange  for  10,000  bales  against  those  which  he  had  sold  in  September 
at  8j  cents,  obtaining  these  at  a  corresponding  decline  of  i  cent,  or, 
say,  7^  cents.  The  contract  thus  purchased  will,  of  course,  offset  the 
contract  previously  sold.  In  other  words,  against  a  loss  of  i  cent  on 
his  spot  transaction  he  has  made  a  profit  of  i  cent  on  his  transaction 
iji  futures,  so  that  the  margin  of  one-half  cent  which  he  allowed  to 
cover  expenses  and  profit  again  remains  undisturbed. 

In  ordinary  business  such  a  merchant,  instead  of  selling  out  all  his 
stock  of  cotton  at  one  time  and  at  one  price,  disposes  of  it  in  parcels  at 
varying  prices;  but  as  fast  as  he  sells  a  given  quantity,  say,  1,000 
bales  of  his  actual  cotton,  he  at  once  buys  future  contracts  for  a  like 
amount  on  the  exchange  at  corresponding  prices  so  that  when  his 
actual  cotton  is  all  sold  he  has  "bought  in"  suflacient  future  contracts 
to  offset  or  "cover"  those  previously  sold. 

The  opportunity  for  using  the  future  market  for  hedging  purposes 
is  also  open  to  the  spinner.  Take  the  case  of  a  spinner  who  requires 
10,000  bales  of  cotton  for  his  season's  operations,  and  who,  at  the 
beginning  of  the  cotton  year,  has  outstanding  no  contracts  for  the  sale 
of  his  manufactured  goods.  If  he  were  to  buy  his  entire  10,000  bales 
of  cotton  or  the  bulk  of  it  at  once  and  store  it,  while  competitors  were 
to  buy  only  from  day  to  day,  a  sharp  decline  in  the  price  of  cotton 
would  leave  him  with  a  relatively  high  manufacturing  cost  for  his 
finished  product,  which  he  would  consequently  be  able  to  dispose  of, 

•  The  value  may,  however,  be  affected  by  changes  in  the  values  of  various 
grades  relatively  to  the  basis  grade,  that  is,  middling. 


PROFITS  80s 

in  competition  with  those  spinners  who  had  postponed  their  purchases 
of  raw  material  until  the  decline,  only  at  a  loss  or  at  a  reduced  profit. 
Under  the  future  system,  such  a  spinner,  having  bought  his  10,000 
bales  of  actual  cotton,  could  protect  himself  by  immediately  going  into 
the  future  market  and  selling  a  corresponding  quantity  of  future 
contracts.  If  the  price  of  cotton  goes  down,  the  loss  on  his  stock 
should  be  made  good  by  his  ability  to  buy  in  future  contracts  at  a 
corresponding  decline  against  those  which  he  previously  sold  short. 
As  fast  as  he  works  up  a  given  quantity  of  his  stock  of  cotton  into 
manufactured  goods,  he  buys  in  a  corresponding  number  of  future 
contracts. 

The  hedging  system  is  used  in  a  somewhat  different  way  in  the 
case  of  a  manufacturer  of  cotton  goods  who  has  sold  his  product 
under  contract  for  forward  delivery,  but  who  has  not  purchased  a 
supply  of  raw  material.  In  this  case  a  decline  in  the  price  of  cotton 
is  obviously  to  his  advantage.  On  the  other  hand,  a  sharp  advance  in 
the  price  of  cotton,  after  he  has  agreed  to  deliver  the  manufactured 
goods  at  a  fixed  price,  as  obviously  tends  to  reduce  his  profits,  or  per- 
haps to  result  in  loss.  Such  a  manufacturer  would  protect  himself 
by  buying  a  suflficient  number  of  contracts  in  the  future  market  at  the 
time  he  sells  his  goods  to  cover  his  prospective  needs.  If  the  price  of 
cotton  goes  up  before  he  has  completed  his  contracts  for  the  delivery 
of  cotton  goods,  his  loss  on  actual  cotton  is  presumably  covered  by  a 
profit  on  the  futures  so  purchased;  whereas,  if  the  price  declines,  the 
loss  on  his  future  contracts  is  correspondingly  covered  by  his  saving 
on  purchases  of  the  actual  staple.  As  already  pointed  out,  the  manu- 
facturer seldom  obtains  his  cotton  by  accepting  it  as  a  delivery  on 
the  contracts  so  purchased. 

The  protection  thus  afforded  by  the  hedging  system  is  far-reaching. 
Not  only  may  the  system  be  used,  in  the  manner  indicated,  by  the 
cotton  merchant  and  the  spinner  to  protect  themselves  against 
fluctuations  in  the  price  of  cotton,  but  it  may  be  used  by  spinners,  or, 
for  that  matter,  by  dealers  in  cotton  goods,  in  a  similar  way,  to  protect 
themselves  against  fluctuations  in  the  price  of  the  manufactured 
product.  Suppose,  for  instance,  that  a  spinner  or  a  wholesale  mer- 
chant finds  that  he  is  carrying  a  heavy  stock  of  cotton  goods  at  a  time 
when  the  trade  outlook,  for  one  reason  or  another,  is  unfavorable,  the 
demand  has  slackened,  and  a  decline  in  prices  is  imminent.  Without 
the  future  system,  the  owner  of  such  a  stock  of  goods  would  be  forced 
either  to  sacrifice  them  at  the  decline  or  to  carry  them  for  an  indefinite 


8o6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

period  in  the  hope  of  a  subsequent  revival  in  demand,  in  which  case 
it  would  be  extremely  uncertain  whether  such  a  subsequent  advance 
would  cover  the  heavy  expenses,  such  as  interest,  storage,  etc.,  which 
necessarily  accompany  any  such  carrying  of  the  stock.  Under  the 
future  system  he  can  to  a  large  extent  avoid  either  of  these  prospec- 
tive losses  by  selling  future  contracts  in  cotton  against  his  stock  of 
manufactured  goods.  The  actual  number  of  cotton  contracts  thus 
sold  is  usually  based  upon  the  weight  of  cotton  required  to  make  a 
given  quantity  of  goods,  which,  of  course,  would  vary  with  the  char- 
acter of  the  latter.  If  the  owner  of  such  a  stock  of  cotton  goods  finds 
that  his  fears  of  a  decline  in  the  value  of  his  manufactured  product 
are  realized,  it  is  reasonably  certain  that  the  value  of  cotton — since  it 
is  practically  the  only  raw  material  used  in  the  manufacture  of  these 
goods — will  decline  in  fairly  close  correspondence,  in  which  case  the 
price  of  future  contracts  should  also  decline  in  sympathy  with  the 
staple.  In  this  way,  his  loss  on  the  goods  is  largely  counterbalanced 
by  his  profit  on  the  sale  of  cotton  contracts.* 

It  is  apparent  from  even  the  brief  illustrations  given  that  a  prop- 
erly conducted  future  system,  through  this  opportunity  for  hedging, 
affords  a  great  protection  to  the  most  legitimate  sort  of  business  and 
one  of  almost  incalculable  value.  It  should  be  noted,  however,  that 
hedging  does  not  absolutely  guarantee  a  merchant  from  loss,  since 
advances  or  declines  in  the  price  of  his  future  contracts  may  not 
exactly  correspond  with  advances  or  declines  in  the  price  of  spot 
cotton.  The  illustrations  above  given  assume  that  absolutely  correct 
methods  of  conducting  the  future  business  have  been  established. 
It  can  not  be  too  forcibly  emphasized,  therefore,  that  in  practice  it 
has  happened  at  various  times  that  hedges  have  afforded  a  far  less 
perfect  measure  of  protection  than  above  indicated.  The  hedging 
process  has  been  explained  mainly  to  show  that  the  future  system 
is  something  more  than  a  device  for  mere  speculation,  and  that 
it  presents  benefits  of  great  value  to  those  conducting  business  in 
actual  cotton.  In  fact,  for  these,  as  individuals,  the  future  system,  if 
properly  used,  may  be  said  to  largely  eliminate  speculation.'  Obvi- 
ously, for  a  merchant,  without  hedging,  to  buy  10,000,  20,000,  or 
50,000  bales  of  a  valuable  commodity  like  cotton,  which  is  subject  to 
great  fluctuation  in  price,  would  be  a  highly  speculative  transaction, 

'  Hedges  are  sometimes  used  in  this  way  by  retail  merchants  carrying  only  a 
few  thousand  dollars'  worth  of  goods. 

•  See  note  i,  page  803. 


PROFITS  '  807 

whereas,  under  a  perfect  working  of  the  hedging  system,  the  element 
of  speculation  can  be  largely  avoided.  This  opportunity  for  hedging 
is,  indeed,  regarded  by  practically  all  cotton  merchants  as  almost  an 
absolute  necessity  under  modem  methods  of  conducting  business. 

An  idea  of  the  value  of  the  hedging  function  may  be  obtained  when 
it  is  stated  that  in  Great  Britain  banks  very  generally  refuse  to  loan 
money  on  cotton  which  is  not  hedged.  Moreover,  it  is  almost 
universally  conceded  that,  since  the  introduction  of  hedging,  failures 
in  the  cotton  trade,  which  had  previously  been  frequent,  have  been 
materially  reduced  as  a  direct  result  of  the  greater  stability  with 
which  transactions  in  spot  cotton  can  be  conducted. 

229.    FIRE  INSURANCE  AND  CREDIT* 

Fire  insurance  plays  another  very  important  role,  besides  those 
already  enumerated.*  It  is  the  support  of  commerce  and  industry 
in  so  far  that  it  is  the  basis  of  our  whole  credit  system.  The  impor- 
tance of  insurance  in  this  respect  becomes  apparent  when  we  reflect 
that  it  is  estimated  that  only  about  5  per  cent  of  the  world's  business 
is  conducted  on  a  cash  basis,  and  that  95  per  cent  is  based  on  credit. 

A  thousand  illustrations  can  be  cited  to  show  the  far-reaching 
influence  of  fire  and  marine  insurance  upon  our  credit  system.  A 
cargo  of  grain  is  shipped  from  the  United  States  to  Europe,  and  is 
paid  for  through  the  shipment  of  a  cargo  of  manufactures  from  Europe 
to  America.  Here  we  have  a  transaction  based  on  credit  and  con- 
summated without  the  use  of  cash.  Commodities  are  used  to  pay 
for  commodities,  and,  owing  to  the  costliness  of  settling  international 
debts  by  the  actual  transfer  of  gold  from  one  country  to  another,  this 
practice  is  almost  invariably  adopted.  The  whole  transaction  is 
based  on  credit,  and  the  important  thing  to  remember  is  that  the 
foreign  exchange  banker,  who  undertakes  the  financial  settlement  of 
these  two  shipments,  knows  that  this  credit  is  guaranteed  by  a  fire  and 
marine  insurance  policy.    The  insurance  of  these  cargoes  in  rehable 

'  From  Solomon  S.  Huebner,  Property  Insurance,  pp.  9-13.  D.  Appleton  & 
Co.,  191 1. 

[»The  author  mentions  three  other  fimctions  of  fire  insurance:  (i)  The  reduc- 
tion of  the  element  of  uncertainty  resulting  from  a  combination  of  risks;  (2)  the 
benefit  resulting  from  having  a  specialized  business  for  the  assumption  of  risks  of 
producers  who  are  ignorant  of  the  relative  fire  hazard  connected  with  the  different 
types  of  property;  (3)  the  increase  in  the  efl&ciency  of  men  because  they  venture 
more  willingly. — Editors.] 


8o8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

companies  made  the  transaction  as  certain  as  though  all  payments 
were  made  in  cash.  If  the  property  involved  in  any  of  these  shipments 
had  been  destroyed  by  fire  or  by  the  perils  of  the  sea,  the  creditors 
would  nevertheless  be  protected,  since  the  loss  would  be  made  good 
by  the  insurance  companies. 

Without  fire  insurance  as  collateral  security  the  wholesale  mer- 
chant could  not  extend  credit  to  the  retailer.  But  with  the  goods 
insured  in  a  reliable  company  against  loss  by  fire,  the  wholesale 
merchant  can  grant  an  able  and  honest  retailer  credit  to  the  extent  of 
five  times  his  capital,  and  at  the  same  price  he  would  demand  if  paid 
cash.  Because  of  the  protection  promised  by  an  insurance  company 
the  wholesaler  advances  the  goods  to  the  retailer.  He  knows  the 
retailer  to  be  honest  and  able,  and  that  when  the  goods  are  sold  he 
will  receive  his  payment  out  of  the  proceeds  of  the  sale.  The  only 
risk  is  the  danger  of  destruction  of  the  goods  before  the  retailer  has 
sold  them,  thus  probably  making  their  payment  impossible.  Through 
insurance  this  risk  is  eliminated  and  the  retailer  becomes  a  cash 
trader,  as  far  as  the  securing  of  favorable  terms  from  the  wholesaler  is 
concerned. 

In  the  same  way,  the  wholesaler,  if  he  is  operating  on  borrowed 
money,  can  secure  the  most  favorable  rate  from  the  lender  of  credit,  if 
he  protects  his  banker  or  the  manufacturer  of  the  goods  with  an 
insurance  policy.  In  buying  the  goods  the  wholesaler  may  pay  only 
lo  per  cent  of  the  purchase  price  in  cash,  the  remaining  90  per  cent 
being  advanced  as  a  loan  by  the  banker  or  manufacturer,  the  security 
for  the  loan  being  the  goods  themselves,  but  only  when  insured  against 
loss  by  fire.  Of  course  the  wholesaler  or  retailer,  as  the  case  may  be, 
must  pay  for  the  insurance,  but  the  reduced  price  at  which  he  gets  the 
goods,  or  the  favorable  rate  of  interest  at  which  he  secures  the  credit, 
pays  for  this  insurance  over  and  over  again.  As  an  insurance  policy 
may  be  made  to  cover  all  stock  that  goes  into  a  store  from  time  to 
time  during  the  term  of  the  policy,  $10,000  of  insurance  may,  in  the 
course  of  a  year,  have  under  its  protection  from  $50,000  to  $75,000 
worth  of  merchandise,  thus  distributing  the  cost  of  the  insurance  over 
large  property  values. 

It  may  be  shown  in  another  way  that  fire  insurance  enables  a 
man  with  limited  capital  to  transact  a  business  much  larger  than  he 
otherwise  could.  Assume  a  grain  dealer  to  be  the  possessor  of  $40,000 
capital.  With  this  capital  he  purchases  wheat  in  the  West  at  $1  a 
bushel,  with  a  view  to  selling  it  in  the  East  or  storing  it  in  a  warehouse 


PROFITS  809 

for  a  more  favorable  market.  If  this  grain  dealer's  transactions  were 
limited  to  cash  purchases  of  wheat,  he  would  probably  be  obliged  to 
wait  several  weeks  before  he  could  sell  his  grain  and  liberate  his 
capital  for  a  new  purchase,  and  his  profit  would  be  exceedingly  small, 
since  modern  competition  in  that  business  enables  him  to  realize  a 
profit  of  only  one  to  two  cents  per  bushel.  Grain  dealers  cannot 
afford  to  transact  business  on  this  basis,  and  all  are  obliged  to  resort 
to  the  use  of  credit.  Instead  of  limiting  his  purchases  to  40,000 
bushels,  our  dealer  will  at  once  have  this  wheat  inspected,  graded, 
represented  by  warehouse  receipts,  and  will  have  it  insured  against 
loss  by  fire  in  a  reliable  company.  Then  he  will  take  the  warehouse 
receipts,  representing  the  wheat,  and  the  insurance  policy  to  his 
banker  as  collateral  security  for  a  loan  and  the  banker  will  lend  him 
money,  probably,  to  the  extent  of  90  per  cent  of  the  value  of  the  wheat, 
or  $36,000.  If  wheat  remains  at  $1  a  bushel,  the  dealer  can  at  once 
purchase  36,000  bushels  more  with  the  proceeds  of  this  loan.  This 
new  purchase  of  wheat  will  again  be  represented  by  new  warehouse 
receipts,  and  again  protected  by  a  fire-insurance  policy,  and  the  ware- 
house receipts  and  the  policy  covering  the  36,000  bushels  can  be  offered 
to  the  banker  as  collateral  security  for  a  new  loan  of  90  per  cent  of  the 
value,  or  say  $32,400.  With  this  new  loan  the  dealer  can  at  once 
purchase  more  wheat,  can  insure  it,  and  with  the  new  warehouse 
receipts  and  the  fire-insurance  policy  as  collateral  obtain  another  loan, 
and  with  this  loan  buy  more  wheat.  By  repeating  the  operation 
until  his  original  capital  has  been  absorbed  in  margins,  it  becomes 
clear  that  this  grain  dealer,  though  he  started  with  only  $40,000 
capital,  is  nevertheless  enabled,  through  the  use  of  fire  insurance,  to 
do  a  $300,000  business,  and  accordingly  makes  seven  or  eight  times  the 
profit  he  could  realize  if  his  business  were  restricted  to  cash  trans- 
actions. The  banker  is  willing  to  extend  the  credit,  partly  because  he 
knows  that  wheat  always  has  a  ready  market  on  our  big  produce 
exchanges,  thus  in  case  of  a  decline  in  price  giving  him  a  chance  to 
sell  the  wheat  before  the  margin  of  ten  points  on  the  loan  is  exhausted, 
and  partly  because  the  fire-insurance  policy  protects  him  against  the 
loss  by  fire  of  the  security  back  of  his  loans.  Likewise  the  exporter  of 
a  cargo  of  cotton  may  insure  it  under  a  marine  policy,  and  with  the 
policy  and  bill  of  lading  as  collateral  may  at  once  command  money  at 
the  usual  rate  of  interest,  with  which  to  buy  another  cargo  and  repeat 
the  operation. 

Insurance  also  helps  to  build  homes,  since  the  owner  of  ground 


8iO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

who  wants  to  build  a  home  can  borrow  a  larger  sum  of  money  on  the 
building,  if  insured,  and  at  a  more  favorable  rate,  than  if  there 
were  no  insurance.  Mortgagees  invariably  have  their  interest  in 
the  mortgagor's  property  protected  by  an  insurance  policy.  In  a 
hundred  ways  fire  and  marine  insurance  have  become  absolute 
necessities  of  trade,  without  the  assuring  protection  of  which  the  large 
undertakings  of  today  would  be  a  gigantic  gamble,  and  would  never  be 
attempted  if  liable  to  miscarry  through  a  single  fire  or  marine  disaster. 
As  it  is,  enormous  sums  are  borrowed  on  stocks  and  bonds  and  ware- 
house receipts;  merchants  sell  their  wares  on  credit;  investors  furnish 
millions  for  the  upbuilding  of  vast  industries  supporting  whole  towns; 
capitalists  make  loans  on  buildings  worth  many  times  the  value  of  the 
ground  on  which  they  are  built — all  being  willing  to  do  this  because 
they  know  that  the  insurance  policy  stands  as  collateral  between  them 
and  loss.  "  All  in  all,"  as  Mr.  Campbell  writes,  "  no  statistics  would  be 
possible  to  show  the  extent  of  the  fire-insurance  business  as  now  prac- 
ticed, for  those  figures  would  need  to  be  as  large  as  those  of  all  trade. 
There  is  practically  no  combustible  property  that  is  not  insured  against 
fire;  every  car  of  grain,  ever  scowload  of  lumber,  every  bale  of  cotton, 
every  package  of  manufactured  goods,  from  the  time  it  assumes  mer- 
chantable shape  until  it  is  entirely  consumed,  is  thus  conditionally  the 
property  of  insurers.  Without  such  a  system,  modern  commerce 
would  be  impossible.  The  fire-insurance  policy,  or  the  assignment  of 
certain  interests  in  it,  is  attached  to  the  mortgage  given  by  the  farmer 
for  money  to  build  his  new  barn;  the  fire-insurance  policy  is  as  neces- 
sary to  the  banker  as  is  the  warehouse  or  shipping  receipt  on  the 
strength  of  which  he  advances  funds  for  that  magic  of  commerce 
'moving  the  crop';  fire  insurance  is  as  important  to  the  manufacturer 
as  is  the  foundation  under  his  factory;  fire  insurance  is,  in  fact, 
the  very  backbone  of  that  part  of  social  life  which  has  to  do  with  mak- 
ing, moving,  and  keeping  material  things." 

230.    EMBARRASSMENT  OF  INDUSTRY  THROUGH  LACK  OF 

INSURANCE' 

Business  men  in  Missouri  are  beginning  to  realize  that  an  un- 
precedented situation  will  exist  in  their  state  after  April  30,  when  all 
the  stock  fire  insurance  companies  will  stop  doing  business  because  of 

'Adapted  from  The  Journal  of  Commerce  and  Commercial  Bulletin,  April  18, 


PROFITS  8ll 

what  they  hold  to  be  the  impossible  requirements  of  the  new  Orr  anti- 
compact  law.  Loans  are  being  canceled,  lines  of  commercial  credit 
are  being  reduced  or  cut  off  entirely  and  it  is  at  last  being  realized 
to  how  many  branches  of  trade  the  protection  of  fire  insurance  is 
absolutely  essential. 

In  the  meantime  business  men  are  urging  the  state  authorities 
to  grant  them  some  relief.  In  many  lines  of  activity,  where  credit 
is  essential,  based  upon  the  fire  insurance  to  protect  the  actual  values, 
business  will  be  practically  paralyzed. 

The  Metropolitan  Life  has  called  off  negotiations  for  a  loan  of 
$1,200,000  it  was  preparing  to  make  for  the  erection  of  a  ten-story 
office  building  in  St.  Louis,  refusing  to  go  any  further  until  it  can  be 
assured  that  its  value  can  be  protected  by  sound  insurance. 

The  chief  credit  manager  of  a  large  mercantile  house  said  today , 
"The  situation  in  Missouri  threatens  to  be  serious.  Lack  of  fire 
insurance  will  undoubtedly  affect  our  action  in  extending  credit. 
There  are  many  merchants  to  whom  we  might  extend  a  reasonable 
line,  provided  their  goods  not  yet  paid  for  in  full  were  protected  by 
insurance,  whom  we  will  be  forced  to  refuse  if  we  cannot  have  this 
necessary  guarantee." 

'      231.    SOME  FUNCTIONS  AND  EFFECTS  OF  INSURANCE' 

Technical  insurance  is  defined  as  that  arrangement  by  which  per- 
sons subject  to  a  risk  agree  directly  or  indirectly  with  each  other 
that  those  who  escape  the  threatening  event  will  make  up  to  those 
who  suffer  by  it  the  whole  or  a  part  of  the  loss. 

The  main  purpose  of  technical  insurance  is  to  relieve  the  individual 
of  the  burden  of  risk  resting  upon  him.  Aside,  however,  from  the 
direct  effect  of  technical  insurance,  there  are  certain  subsidiary  effects 
upon  the  social  organism.  Some  of  these  effects  are  good,  and  some 
are  unfavorable.  Let  us  consider  the  good  effects:  (a)  The  decrease 
of  the  cost  of  production.  Under  the  head  of  producer's  insurance 
we  saw  that  risk  to  the  individual  producer  was  a  subjective  cost, 
and  that  marginal  subjective  estimates  of  risk  enter  in  as  a  deter- 
minant of  objective  cost.  Now,  technical  insurance  comes  in,  and 
removes  the  major  part  of  this  item  of  cost.  The  producer,  in  place 
of  carrying  a  risk  that  is  burdensome  to  him,  pays  a  premium  which 

'  Adapted  from  John  Haynes,  "Risk  as  an  Economic  Factor,"  in  The  Quarterly 
Journal  of  Economics,  IX,  442-46  Quly,  1895). 


8X2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

is  relatively  light.  Nowhere  is  this  more  true  than  in  the  case  of 
marine  insurance.  Imagine  that  marine  insurance  did  not  exist. 
The  shipping  business  would  be  carried  on  only  by  great  companies 
possessing  many  ships,  so  that  they  could  get  the  benefit  of  self- 
insurance.  It  needs  no  argument  to  prove  that  the  price  of  foreign 
merchandise  would  be  much  higher  than  now.  Fire  insurance  is 
another  excellent  example  of  this  fact.  This  brings  us  directly  to 
the  next  advantage  of  technical  insurance,  which  is  a  corollary  of 
what  has  just  been  said,  (b)  It  makes  it  possible  for  small  producers 
to  hold  their  own,  where  otherwise  they  would  be  forced  out  of  busi- 
ness, (c)  Technical  insurance  prevents  the  impairment  of  the  pro- 
ductive force  of  society  by  putting  productive  agents  back  into  their 
old  positions  after  a  disaster.  President  Walker'  shows  how  labor 
may  become  permanently  degraded  as  the  result  of  temporary  mis- 
fortune. Suppose  a  village  whose  chief  support  is  a  single  industrial 
establishment.  Suppose  this  establishment  burned,  with  no  insur- 
ance. The  employer  cannot  readily  transfer  himself  to  another  place 
where  his  talents  can  be  used  so  advantageously,  and  the  same  is  true 
of  the  laborers.  Both  become  discouraged,  and  the  industrial  effi- 
ciency of  master  and  man  may  be  forever  impaired.  Insurance 
guards  against  this  calamity.  Fire  insurance,  accident  insurance, 
and  msurance  against  sickness  are  efficient  in  the  same  way.  Life 
insurance  in  a  more  direct  way  accomplishes  the  same  result  by  keep- 
ing families  together,  and  allowing  the  orphan  children  to  be  brought 
up  with  proper  training,  all  of  which  results  ultimately  in  increased 
productivity,  (d)  Technical  insurance  is  an  aid  to  credit.  The 
practice  is  universal  of  requiring  houses,  or  other  inflammable  property 
on  which  money  is  raised  by  mortgage,  to  be  insured.  Without 
insurance,  many  who  now  borrow  freely  from  savings-banks  and 
other  lenders  would  be  unable  to  borrow  at  all,  and  others  would 
borrow  only  at  ruinous  rates,  (e)  Life  insurance  combines  what  I 
have  called  self-insurance  of  the  nature  of  saving  with  technical 
insurance.  A  form  of  life  insurance  which  does  not  do  this  is  con- 
ceivable, and  has  sometimes  been  tried;  but  the  common  form  lays 
aside  a  reserve  fund  against  the  claim  of  each  person  insured.  This 
form  of  insurance,  therefore,  encourages  capitalization.  This,  to  be 
sure,  is  not  a  net  gain,  because  a  man  who  is  insured,  feeling  a  sense 
of  security,  is  likely  to  spend  that  part  of  his  income  which  is  left 
after  paying  his  insurance  premium  more  freely  than  would  be  the 

«  Wages  Question,  chap.  iv. 


PROFITS  813 

case  if  he  were  not  insured.  But,  as  premiums  are  generally  paid 
out  of  income,  we  may  conclude  with  Schonberg*  that  "there  is 
generally  a  stronger  building  up  of  private  capital  than  would  other- 
wise follow."  (/)  The  sociological  and  ethical  effects  which  result 
from  the  security  and  comfort  which  insurance  gives  are  influences 
for  good. 

The  good  effects  above  enumerated  are  not  without  some  off- 
setting disadvantages.  Security  is  good,  but  security  as  well  as 
hazard  may  have  an  unfavorable  effect  upon  industry,  (a)  Intensity 
of  effort  is  diminished.  Make  the  ordinary  man's  future  secure  even 
on  a  low  material  basis,  and  his  energy  will  flag  to  some  extent. 
(b)  Carelessness  is  encouraged  by  insurance.  Much  wealth,  for 
instance,  goes  up  in  smoke  simply  because  vigilance  is  relaxed  on 
account  of  the  property  being  insured,  (c)  The  greatest  disadvantage 
of  technical  insurance  is  the  encouragement  which  it  gives  to  dis- 
honesty. Property  is  wilfully  destroyed  to  get  insurance,  thus 
increasing  the  net  amount  of  property  destroyed  and  increasing  the 
cost  of  insurance  to  honest  men.  I  have  been  informed  that  where  a 
mill  burns  in  a  factory  village  the  village  hotel  is  almost  sure  to  follow. 
The  same  informant  gtates  that  a  prudent  insurance  man  of  his 
acquaintance  makes  it  a  rule,  on  learning  of  the  burning  of  a  mill 
in  a  village,  to  cancel  all  insurance  held  by  him  on  the  hotel.  It  is 
estimated*  that  from  35  to  50  per  cent  of  the  loss  by  fire  in  the 
United  States  is  chargeable  to  incendiarism. 

Technical  insurance  is  attended  with  a  large  expense  for  manage- 
ment, and,  at  present,  this  is  excessive.  Not  that  insurance  men 
make  greater  gains  than  other  business  men,  but  there  are  more 
agents  for  all  kinds  of  insurance  companies  than  there  is  economic 
justification  for.  This  is  true  of  a  great  many  other  kinds  of  busi- 
ness. But  insurance  furnishes  one  of  the  best  examples  of  the  tre- 
mendous wastes  of  the  competitive  system. 

•  Volkswirthschaftslehre,  p.  798. 

» Thomson,  "Waste  by  Fire,"  Forum,  II,  27  ff.     (September,  1886). 


8x4 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


333.    FINANCIAL  STATEMENTS  OF  TWO  CORPORATIONS 

I' 

The  Income  Account 
$i,4cxD,o'57.oo 


Manufacturing  earnings 
Other  earnings 


Total  income 

Expenses  and  maintenance . 

Interest  on  bonds 

Sinking  fund 


Available  for  dividends . 
Dividends  paid 


Carried  to  surplus . 


$312,218.00 
850,000.00 
100,000.00 


125,434.00 


Si,S25»S3ioo 


$1,262,218.00 

263,313.00 
249,564.00 

$13,749.00 


The  Balance  Sheet 


Assets 

Paper  mill  plants  and 
real  estate $16,689,441 

Good  will,  trade  marks, 
etc 18,010,150 

Cash 722,754 

Bills  and  accounts  re- 
ceivable       i>32i,93S 

Goods  and  materials . . .       2,901,697 

Bonds  of  the  company 

in  treasury 1,120,152 

Miscellaneous  stocks. . .         254,472 

Sinking  fund 1,504,750 


Total $42,525,351 


LiabQities 

Capital  stock $22,000,000 

Bonded  d«bt 17,000,000 

Accounts  payable  and 

current  bills 1,221 

Sinking  fund  reserve . .  1,504,750 

Surplus 2,019,380 


Total $42,525,351 


Adapted  from  American  Writing  Paper  Company,  Annual  Report,  191 1. 


PROFITS  8iS 

II' 

The  Income  Account 

Sales  of  harvesting  machinery,  tillage 

implements,     engines,     tractors, 

cream  separators,   farm   wagons, 

manure   spreaders,    auto-wagons, 

twine,  and  steel  products $125,438,104.30 

Miscellaneous  earnings    and    charges 

(net) 1,080,133.32 

$126,518,237.62 

Deduct: 

Cost    of    manufacturing    and    dis- 
tributing    $98,088,042 .  66 

Ordinary  repairs   and  maintenance  3,241,255.51 
Renewals  and  minor  improvements  776,358.74 
Experimental ,  development,  and  pat- 
ent expenses 746,147 .  92 

Administrative  and  general  expenses  740,390. 36 

Interest  on  loans 2,372,307. 70 

Appropriation  for  fire  insurance  fund  2  50,000 .  00 

Reserve  for  pension  fund 250,000. 00 

Reserve  for  industrial  accident  fund  250,000.00 
Reserves  for  plant  depreciation  and 

ore  extinguishment 2,308,137. 57 

Reserves  for  contingent  losses  and 

collection  expenses  on  receivables  1,100,000.00 

$110,122,640.46 

Net  profit $  16,395,597.16 

Preferred  stock  dividends $4,200,000. 00 

Common  stock  dividends 4,000,000. 00 

$8,200,000.00 

Undivided  profits  carried  to  surplus  8,195,597. 16 

Previous  surplus 23,390,946. 90 

Total  surplus  at  end  of  year . . .  $31,586,544 .  06 

'From  International  Harvester  Company,  Annual  Report,  19 12. 


8l6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  Combined  Balance  Sheet 

Assets 

Property  account: 

Real  estate  and  plant  property,  ore 
mines,  coal  and  timber  lands, 
December  31,  1911 $75,527,097.21 

Net  capital  additions  during  1912.  .  2,668,110.91 

$78,195,208.12 
Expenditures  for  stripping  and  de- 
velopment at  ore  mines 1,070,408. 93 

$79,265,617.05 

Deferred  charges  to  operations 191,512.41 

Fire  insurance  futid  assets 1,484,237 .  50 

Current  assets: 
Inventories: 
Finished  products,  raw  materials, 

etc.,  at  close  of  1912  season. . .       $49,386,478. 19 
Subsequent    material    purchases 
and     manufacture     for     1913 
season 25,691 ,737 .  68 

$75,060,215.87 
Receivables: 

Farmers'    and 
agents' notes    .  $62,437,389.11 

Accounts  receiv- 
able      22,761,854.14 

$85,199,243.25 
Deduct: 

Accumulated  re- 
serves for  con- 
tingent losses . .     $3,700,864 .  87 

$81,498,378.38 

Cash 5,420,582 .  69 

$161,979,176.94 

$242,920,543.90 


PROFITS  817 

Liabilities 

Capital  sttck: 

Preferred $60,000,000. 00 

Common 80,000,000. 00 

$140,000,000.00 

Purchase-money  obligations 296,000 .  00 

Current  liabilities: 

Bills  payable $35,260,220.00 

Accounts  Payable: 
Current   invoices, 
payrolls,       ac- 
crued    interest 

and  taxes,  etc. .  $11,687,114.60 
Preferred  stock 
dividend    (pay- 
able March    i, 

1913) 1,050,000.00 

Common  stock 
dividend    (pay- 
able     January 

iS>  1913) 1,000,000.00  $13,737,114.60 

$48,997,334 .  60 

Reserves: 
Plant  depreciation  and  extinguish- 
ment   $11,643,083.39 

Special  maintenance 1,597,948. 56 

Collection  expenses  and  receivables  1,100,000.00 

Fire  insurance  fund 2,612,939. 84 

Pension  fund 1,298,568.45 

Industrial  accident  fund 788,1 25 .  00 

Contingent 3,000,000. 00 

22,040,665.24 

Surplus 31,586,544.06 

$242,920,543.90 


8l8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

23S.    MONOPOLY  PROFITS:     THE  TOBACCO  TRUST* 

This  coincidence  of  a  high  rate  of  earnings  with  a  high  degree  of 
control  evidently  is  not  accidental.  Wherever  possible,  the  Combina- 
tion has  taken  advantage  of  its  monopolistic  position  to  increase 
its  profits.  On  the  one  hand,  it  has  been  able  to  reduce  the  costs  of 
production  as  well  as  the  expenses  of  selling,  and  on  the  other  hand  it 
has  maintained  the  prices  of  its  products  at  the  high  level  established 
at  the  time  the  Combination  was  effected.  This  high  level  of  prices, 
it  will  be  remembered,  was  made  necessary  by  a  temporary  heavy 
increase  in  the  internal  revenue  tax.  The  monopolistic  position  of 
the  Combination  enabled  it,  however,  to  appropriate  to  itself  prac- 
tically the  entire  reduction  subsequently  made  in  the  tax,  by  holding 
prices  at  their  former  level.  Moreover,  whatever  increase  in  costs  .of 
production  through  increase  in  the  price  of  raw  materials  has  occurred 
since  then  has  been  practically  offset  by  additional  increases  in  the 
price  of  the  product. 

234.    AN  EXAMPLE  OF  FORTUITOUS  PROFITS" 

In  his  report  for  1866-67,  the  commissioner  called  attention  to  the 
circumstance  that,  although  the  profits  which  had  accrued  in  the 
manufacture  of  cotton  during  the  period  of  the  war  were  acknowledged 
by  one  of  the  leading  manufacturers  of  the  country  to  have  been 
"painfully  large,"  yet  such  profits  were  the  result  of  extreme  advances 
in  the  prices  of  raw  and  manufactured  material  previously  on  hand, 
rather  than  of  the  operations  of  strictly  legitimate  business;  and  in 
proof  of  this  assumption,  a  statement  was  submitted,  showing  that 
in  the  case  of  one  large  cotton  manufacturing  corporation  in  New 
England,  if  their  mills  had  been  burnt  at  the  commencement  of  the 
war,  their  insurance  lost,  and  their  whole  capital,  other  than  that 
invested  in  cotton,  sunk,  but  the  cotton  on  hand  sold  at  the  highest 
obtainable  prices,  the  result  would  have  afforded  to  the  stockholders 
a  permanent  annuity  of  at  least  twelve  per  cent  on  their  original 
investment.  Now,  what  was  true  of  cotton  manufacturing  at  that 
period  was  equally  true  of  the  wool  manufacture;  and  in  a  majority 
of  instances  the  large  profits  realized  by  the  woolen  manufacturers 

'  From  the  Report  of  the  Commissioner  oj  Corporations  on  the  Tobacco  Industry^ 
Part  I  (1909),  p.  165. 

*  From  the  Report  of  the  Special  Commissioner  of  the  Revenue  (1869),  p.  xciii. 


PROFITS  819 

of  the  United  States  from  1863  to  1866  were  due  rather  to  the  rise 
in  the  price  of  their  raw  material  than  to  any  legitimate  profits 
derived  from  the  manufacture  and  sale  of  their  productions. 

235.    THE  PROFITS  OF  AN  UNDERWRITING  SYNDICATE* 

Very  convincing  evidence  of  an  excessive  issue  of  securities  by  the 
Steel  Corporation  is  afiforded  by  the  enormous  payment  which  it 
allowed  the  underwriting  syndicate,  so  called.  The  syndicate  agree- 
ment provided  that  in  addition  to  undertaking  to  secure  at  least  51 
per  cent  of  the  stocks  of  the  various  companies  originally  to  be 
acquired,  the  syndicate  should  furnish  the  Steel  Corporation  with 
$25,000,000  cash  capital.  In  addition  to  this  sum,  the  syndicate 
incurred  expenses  of  about  $3,000,000  attendant  upon  the  organiza- 
tion of  the  Corporation,  through  fees,  purchase  of  miscellaneous 
securities,  etc.,  which  sum  should  be  added  to  the  $25,000,000  cash 
capital  provided,  in  stating  the  total  cash  consideration  provided 
by  the  syndicate.  For  this  total  cash  consideration  of  $28,000,000 
and  its  services  the  underwriting  syndicate  received  from  the  Steel 
Corporation  the  enormous  total  of  practically  1,300,000  shares  of  its 
stock  (half  preferred  and  half  common),  of  an  aggregate  par  value 
of  $130,000,000.  That  this  huge  block  of  stock  was  actually  received 
by  the  syndicate  was  explicitly  stated  in  the  preliminary  report  of 
the  Steel  Corporation,  which,  after  giving  the  amounts  of  stock  issued 
to  acquire  the  securities  of  the  constituent  concerns,  further  stated: 

The  residue  of  the  common  and  preferred  stock  of  this  corporation 
delivered  to  the  syndicate  under  the  contract  of  March  i,  1901,  and  not 
used  for  the  acquisition  by  it  of  the  stocks  of  the  specified  companies, 
being  the  shares  which,  as  stated  in  the  syndicate  circular  of  March  2,  1901, 
were  to  be  retained  by  and  to  belong  to  the  syndicate,  amoimted  to  649,987 
shares  of  preferred  stock,  and  649,988  shares  of  common  stock.  This 
residue  of  stock  or  the  proceeds  thereof,  after  reimbxursing  the  sjmdicate 
the  $25,000,000  in  cash  which  it  paid  to  the  Corporation,  and  approxi- 
mately $3,000,000  for  other  sjoidicate  obligations  and  expenses,  con- 
stituted surplus  or  profit  of  the  syndicate. 

This  enormous  "residue,"  as  it  was  termed,  yielded  a  very  large 
profit  to  the  syndicate.    At  valuations  of  44  for  the  common  stock 

» Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  the  Steel 
Industry,  Part  I  (191 1),  pp.  243-46. 

[For  the  terms  of  this  underwriting  agreement  see  Selection  89. — Editors.] 


820  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

and  94  for  the  preferred  stock  (the  average  prices,  respectively,  at 
which  these  shares  sold  during  the  first  year  after  the  organization 
of  the  Steel  Corporation),  the  total  value  of  these  stocks  thus  delivered 
to  the  syndicate  would  have  been  approximately  $89,700,000.  As  a 
matter  of  fact,  it  appears  that  the  amount  actually  realized  by  the 
syndicate  was  about  $90,500,000.  After  reimbursing  the  syndicate 
for  the  $25,000,000  cash  capital  raised  by  it,  and  also  for  the  $3,000,000 
incurred  in  expenses,  the  syndicate  managers  paid  out  in  profits  to 
syndicate  members  substantially  $50,000,000.  Before  distributing 
these  huge  profits,  however,  J.  P.  Morgan  &  Co.,  as  syndicate  man- 
agers, reserved  as  their  compensation  20  per  cent  of  the  total  profits. 
The  total  profits  consequently  were  one-fourth  greater  than  the 
amount  thus  distributed  to  syndicate  members,  or,  in  other  words, 
they  were,  roughly  speaking,  $62,500,000. 

It  may  be  noted  that  about  $4,000,000  of  this  total  was  not  in  the 
form  of  cash.  After  reimbursing  the  syndicate  for  its  cash  obligations 
of  $28,000,000,  the  syndicate  managers  paid  four  cash  dividends  of 
$10,000,000  each  (after  reserving  in  each  case  their  20  per  cent  com- 
mission), and  a  final  dividend  of  $6,000,000  in  cash  plus  $4,000,000 
paid-up  participation  in  a  syndicate  then  being  organized  by  J.  P. 
Morgan  &  Co.  to  underwrite  the  so-called  "bond  conversion"  scheme 
of  the  Corporation.  There  is  some  question  whether  this  $4,000,000 
participation  in  the  second  syndicate  realized  its  par  value  on  the 
liquidation  of  that  syndicate,  but  any  difference  between  the  amount 
finally  realized  and  the  par  value  ($4,000,000)  was  undoubtedly  so 
small  that  it  can  be  disregarded.  The  profit  on  this  operation  over 
and  above  all  expenses  may  therefore  be  fairly  stated  at  $62,500,000. 

There  can  be  no  question  that  this  huge  compensation  to  the  syndi- 
cate, or,  in  other  words,  the  enormous  block  of  stock  upon  which  this 
profit  was  realized,  was  greatly  in  excess  of  a  reasonable  compensa- 
tion. The  syndicate  was,  of  course,  properly  to  be  reimbursed  not 
only  for  the  $25,000,000  new  cash  capital  which  it  provided  the  Cor- 
poration, and  for  the  $3,000,000  of  expenses  incurred,  but  was  also 
entitled  to  some  compensation  for  the  labor  and  risk  of  raising  these 
sums.  Moreover,  the  syndicate  presumably  rendered  some  other 
services  of  value  in  facilitating  the  organization  of  the  Corporation 
and  the  flotation  of  its  securities,  for  which  it  would  reasonably 
expect  some  compensation.  However,  these  services  certainly  were 
not  worth  anything  like  the  enormous  price  which  the  Corporation 
paid.    Nor  can  this  payment  be  justified  on  the  ground  of  extraordi- 


PROFITS  821 

nary  risk.  The  Corporation  was  organized  at  a  time  of  pronounced 
buoyancy  in  the  stock  market  and  decided  prosperity  in  the  steel 
industry.  It  is  true  that  only  a  short  time  after  its  organization  the 
famous  Northern  Pacific  corner  and  the  resulting  stock-market  panic 
occurred.  Such  a  contingency,  however,  is  one  of  the  possibilities 
that  all  underwriting  syndicates  have  to  take  account  of,  and  was 
entitled  to  no  more  weight  in  this  case  than  in  the  case  of  numerous . 
other  underwriting  arrangements  which  were  made  by  other  large 
corporations  at  the  same  period. 

It  is,  moreover,  true  that  the  nominal  liability  of  the  syndicate, 
or  what  may  be  called  its  nominal  capital,  was  $200,000,000.  This, 
however,  was  the  liability  of  the  syndicate  subscribers  to  the  syndi- 
cate managers  and  not  to  the  Steel  Corporation,  to  which  its  cash 
liability,  as  just  shown,  was  only  $25,000,000  (not  including  $3,000,000 
of  expenses).  It  was  the  understanding,  tacit  or  expressed,  that  the 
syndicate  managers  did  not  expect  to  call  upon  the  syndicate  sub- 
scribers for  more  than  a  single  payment  of  12^  per  cent  of  the  total 
nominal  liability  ($200,000,000),  or  $25,000,000.  As  a  matter  of  fact, 
that  was  the  only  call  actually  made.  Had  a  further  call  been  made 
upon  the  syndicate  subscribers,  this  would  have  been  to  meet  tem- 
porary exigencies  accompanying  the  flotation  of  the  Steel  Corpora- 
tion's stock,  and  not  to  make  any  further  payment  to  the  Corporation 
itself.  The  large  nominal  obligation  of  the  syndicate  subscribers  to 
the  syndicate  managers  apparently  was  determined  upon  in  part  with 
a  view  to  disarming  subsequent  criticism  of  the  enormous  compensa- 
tion which  it  received. 

A  very  important  consideration  to  point  out  is  that  while  the  syndi- 
cate was,  from  the  standpoint  of  the  prestige  and  reputation  of  the 
bankers  identified  with  it,  nominally  compelled  to  see  the  organization 
of  the  Steel  Corporation  successfully  through,  there  was  no  legal 
obligation  of  this  sort  whatever.  Instead,  a  circular  of  the  syndicate 
managers  to  the  stockholders  of  the  various  constituent  concerns 
which  were  to  be  acquired  stated  very  positively  that  the  syndicate 
managers  might  at  any  time  wholly  abandon  the  transaction,  in  which 
event  the  stockholders  in  the  acquired  companies  would  have  no  claim 
whatever  against  the  syndicate  managers.  This  is  shown  by  the 
fourth  paragraph  in  the  ofl&cial  circular  of  J.  P.  Morgan  &  Co.,  the 
syndicate  managers,  as  follows: 

The  undersigned  are  authorized  to  proceed  with  the  proposed  trans- 
action whenever  in  their  sole  judgment  a  sufficient  amount  of  the  stocks 


822 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


of  said  companies,  or  of  any  of  them,  shall  have  been  deposited.  They 
reserve  the  right,  at  any  time,  in  their  discretion,  to  wholly  abandon  the  trans- 
action and  to  withdraw  their  ofifer  herein  contained,  as  to  all  the  depositors, 
by  publication  of  notice  of  such  withdrawal  in  two  daily  newspapers  in  the 
city  of  New  York;  and  in  that  event  all  the  deposited  shares  shall  be 
returned  without  charge  upon  surrender  of  the  respective  receipts  therefor. 
In  case  of  any  such  itntMrawal  of  the  offer  hereunder  as  to  all  or  to  any 
depositors,  such  depositors  shall  have  no  claim  against  the  undersigned,  and 
shall  only  be  entitled  to  receive  their  deposited  securities  upon  surrender  of 
the  respective  receipts  therefor. 

It  may  be  objected,  as  just  suggested,  that  it  is  almost  incredible 
that  the  syndicate  managers  would  abandon  the  transaction.  Never- 
theless, this  distinct  provision  that  they  might  do  so  if  they  saw  fit 
without  giving  any  explanation  and  without  rendering  themselves 
in  the  slightest  way  liable,  clearly  is  entitled  to  great  weight  in 
judging  the  risks  assumed  by  the  syndicate.  As  a  matter  of  fact,  as 
the  sequel  showed,  the  syndicate  was  compelled  to  bear  only  a  very 
moderate  risk,  while  it  was  one  of  the  most  profitable  ever  organized 
in  the  United  States. 

236.    A  CLASSIFICATION  OF  BUSINESS  FAILURES  BY 
CAUSES  (191 1  and  1912)' 


Failurks  Dux  to 


United  States,  Percentaoe 


Number 


igia 


igii 


Liabilities 


1913 


1911 


Canada,  Percentage 


Number 


igia 


igii 


Liabilities 


igi3 


igil 


Incompetence. . , . 

Inexperience 

Lack  of  capital.. . 
Unwise  credits.  . . 
Failure  of  others. , 

Extravagance 

Neglect 

Comp>etition 

Specific  conditions 

Speculation 

Fraud 


30 
4 

29 
3 
I 


2 
6 

7 
o 

3 

•  7 

3.0 

1.9 

16. 5 

.8 

10.3 


27.0 
41 

31-4 
2.0 

1-3 

•9 

3.3 

2.9 

16.9 

•  7 
10.6 


26.8 
30 

33  S 
3.6 

4-9 

•9 

i.o 

1-3 
13-8 

3-4 
8.8 


23s 
2.  2 

28.3 
3.2 

42 
1.3 

1-3 

4.8 

20.7 

3.7 

8.9 


16 
5 

SO 
I 


4 

I 

12 


16. 1 

2.9 

49-3 

■9 

1. 1 

•9 

41 

I.I 

14.6 

•9 
8.1 


23.8 

3  5 
45  8 

1-7 

2-5 

•5 
31 

.6 
8.8 

•4 
10.3 


18.9 

1-5 

47-8 

1.0 

1-4 
32 

2  5 

.6 

10. 1 

31 

9-9 


•  Bradstreet's,  XLI,  j.^. 


PROFITS  823 

237.    TWO  INSTANCES  OF  FAILURE 

The  Allis-Chalmers  Company  has  defaulted  on  the  interest 
payments  due  on  its  bonds.  It  is  unofl&cially  reported  that  the 
company's  embarrassment  is  largely  due  (i)  to  the  decline  in  orders 
for  its  steam  engines,  due  both  to  the  competition  of  turbine  engines 
and  to  the  increasing  use  of  hydro-electric  power;  (2)  to  the  inability 
to  obtain  suflScient  business  to  keep  more  than  a  part  of  its  large 
electric  manufacturing  plant  in  operation;  and  (3)  prospectively 
to  the  heavy  sinking-fund  requirement  which,  beginning  this  year, 
requires  a  steadily  increasing  annual  purchase  of  the  company's 
bonds.  The  directors  are  of  the  opinion  that  the  business  cannot 
be  profitably  continued  in  the  future  unless  additional  working 
capital  is  supplied  and  the  fixed  charges  reduced,  and  that  these  can 
only  be  secured  by  reorganization.* 

The  creditors'  conunittee  of  the  United  States  Finishing  Company 
has  made  a  preliminary  report,  or  a  summary  of  the  situation,  and 
has  furnished  a  digest  over  which  amazed  stockholders  will  pore 
anxiously  for  some  days  to  come. 

Briefly  stated,  the  United  States  Finishing  Company  has  through 
subsidiary  corporations  engaged  in  merchandising,  in  speculating  in 
its  own  stocks  and  bonds,  and  in  financial  collateral  ventures,  such 
as  the  purchase  and  sale  of  lumber,  the  manufacture  of  packing 
boxes,  the  purchase  and  sale  of  chemicals,  supplies,  etc.  Some  of 
these  investments,  noticeably  that  in  the  Queen  Dyeing  Company, 
have  proved  profitable,  but  in  the  main  the  working  capital  of  the 
United  States  Finishing  Company  has  been  depleted  to  the  extent 
of  approximately  $1,250,000.  A  portion  of  the  loss  can  be  accounted 
for  through  the  payment  of  unearned  dividends.  Through  the  recent 
failure  of  the  corporation,  G.  A.  Stafi'ord  &  Co.,  an  additional  loss 
was  sustained.  The  Finishing  Company  owns  the  entire  capital 
stock  of  the  Sterling  Improvement  Company,  which  company  had 
made  substantial  purchases  of  the  stock  and  bonds  of  the  Finishing 
Company,  so  that  through  the  depreciation  of  the  securities  of  the 
Finishing  Company  a  further  loss  was  incurred.  The  market  value 
of  all  the  investments  is  problematical  and  the  realization  of  their 
intrinsic  value  promises  to  become  a  slow  process.' 

'  Adapted  from  The  Commercial  and  Financial  Chronicle,  January  6,  1912. 
•  Adapted  from  The  Journal  of  Commerce  and  Commercial  Bulletin,  May  6, 
1913. 


XDC.    PUBLIC  FINANCE  AND  TAXATION 

338.    THE  GROWTH  OF  STATE  AND  LOCAL  EXPENDITURES' 

In  discussing  the  growth  of  state  expenditures  during  the  nine- 
teenth century,  there  are  adequate  reasons  for  dividing  the  period 
in  quarter-century  divisions  on  the  basis  of  the  different  character 
of  the  expenditures.  The  first  quarter,  from  1800  to  1825,  presents 
nothing  remarkable,  for  the  expenditures  were  neither  large  nor 
varied.  Cities  had  not  yet  risen  to  any  importance  as  industrial 
centers,  and  the  large  debts  of  the  Revolutionary  War  had  been 
assumed  by  the  national  government. 

The  total  population  of  the  United  States  was  only  about  ten 
millions  at  the  close  of  the  first  quarter  century,  and  this  population 
was  distributed  over  a  wide  area,  with  wants  few  and  activities 
simple.  The  bulk  of  the  expenditures  went  for  the  primary  func- 
tions of  government,  with  some  of  the  states  spending  considerable 
sums  on  education  and  others  on  internal  improvements.  However, 
during  the  next  quarter  century,  from  1825  to  1850,  there  was  a 
decided  growth  of  state  expenditures,  for  this  was  the  period  of 
state  activity  in  internal  improvement  and  public  banking. 

The  masses  of  people  in  their  enthusiasm  for  internal  improve- 
ments did  not  think  that  these  undertakings  could  mean  a  burdeo 
to  them  in  the  way  of  increased  tax  levies,  as  is  evidenced  by  the 
debates  on  the  various  bills  proposed  for  their  construction.  They 
supposed  that  the  increase  in  value  of  property  would  more  than 
offset  the  cost  of  their  construction,  and  it  was  not  until  the  later 
forties  that  they  were  awakened  from  their  delusion,  although  care 
must  always  be  taken  in  speaking  of  these  internal  improvements 
as  failures,  for  the  indirect  wealth  and  social  well-being  which  they 
brought  to  the  country  was  very  great.  But  the  people,  on  account 
of  permitting  their  enthusiasm  to  lead  them  to  construct  transporta- 
tion routes  beyond  the  industrial  demands,  and  through  their  enthu- 
siams  being  taken  advantage  of  by  speculators,  found  themselves 

•  Adapted  from  W.  F.  Gephart,  "The  Growth  of  State  and  Local  Expendi- 
tures," in  StaU  and  Local  Taxation,  Addresses  and  Proceedings  of  the  Second 
International  Conference  (1908),  pp.  514-24.  International  Tax  Association, 
iQog. 

834 


PUBLIC  FINANCE  AND  TAXATION 

with  large  financial  burdens  resting  upon  them  at  the  close  of  the 
second  quarter  of  the  century,  which  must  be  met  by  increased 
taxation  or  repudiated.  Some  of  the  states  petitioned  Congress 
to  assume  these  state  debts,  resting  their  claim  on  the  ground  that 
the  public  lands  had  been  transferred  to  the  national  government 
for  the  specific  aid  of  the  states,  and  now  was  the  time  to  extend 
this  aid.  Congress,  however,  refused,  and  there  was  nothing  left 
for  the  states  to  do  but  to  pay  for  these  past  expenditures. 

As  tax  rates  began  to  increase,  many  of  the  states  either  amended 
their  constitutions  or  adopted  new  ones  with  provisions  which  would 
prevent  a  like  occurrence.  These  amendments  and  new  provisions 
limited  the  borrowing  power  of  the  legislatures  and  prohibited  the 
loaning  of  the  credit  of  the  state  or  the  local  governments  to  or  in 
the  aid  of  joint  stock  companies.  After  1850  the  expenditures  of 
the  states  were  kept  down,  since  they  were  paying  for  past  ones. 
The  policy  of  limited  expenditure  and  debt  payment  continued  until 
the  Civil  War,  when  another  period  of  large  expenditures  began,  so 
that  by  1870  the  state  debts  amounted  to  $352,866,698,  the  largest 
sum  at  the  close  of  any  decade  in  the  history  of  the  states. 

The  quarter  century  closing  with  1875  may  be  described  as  one 
in  which  there  was  a  decided  tendency  to  limit  expenditures,  largely 
due  to  the  large  outlays  of  the  preceding  quarter  century,  which  were 
largely  met  out  of  the  revenues  of  the  later  period.  This  policy  of 
limited  state  expenditures  was  in  a  large  way  continued  for  the  next 
decade  after  1875,  although  during  these  years  there  was  somewhat 
of  an  increase  for  such  developmental  functions  as  education,  espe- 
cially in  the  Middle  West,  through  the  establishment  of  state  uni- 
versities, and  the  generally  more  liberal  aid  to  education,  for  the 
establishment  of  institutions  for  the  care  of  the  defective  and  delin- 
quent classes,  for  the  establishment  of  commissions  or  departments 
for  investigation  or  administration  such,  for  example,  as  state  health 
boards,  railroad  and  labor  cormnissions. 

Since  1885  there  has  been  a  tendency  for  state  expenditures  to 
increase,  owing  to  the  states  taking  up  new  lines  of  activity  and 
extending  some  of  the  old  functions. 

It  has  been  held  that  state  expenditures  will  tend  to  decrease, 
as  compared  with  local  and  national  expenditures,  and  while  this 
is  probably  true,  as  a  very  general  proposition,  yet  during  the  past 
two  decades,  particularly  the  last,  we  have  seen  the  states  assuming 
new  functions,  notwithstanding  the  oft  proclaimed  infringement  of 


> 


826  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  state  sphere  of  action  by  the  national  government.  Among 
these  new  Hnes  of  activity  which  will  call  for  increased  expenditures 
may  be  mentioned  the  following: 

(a)  The  centralization  of  state  administration,  such,  for  example, 
as  the  extensive  powers  of  state  boards  of  health.  In  some  states 
no  waterworks,  garbi^ge  disposal,  or  sewage  disposal  plant  may  be 
constructed  by  a  local  government  without  this  board's  approval. 

(b)  The  establishment  of  public  utility  commissions  or  the 
extension  of  the  powers  of  railway  commissions. 

(c)  The  increase  in  the  state  aid  to  education,  not  only  in  favor 
of  the  state  educational  institutions,  but  also  for  the  common  schools. 
Ohio,  for  example,  has  passed  a  recent  law,  which  fixes  a  minimum 
salary  for  public  school-teachers  and  provides  that  where  the  local 
tax  raised  under  the  maximum  rate  is  not  sufficient  to  pay  this 
minimum  salary,  appropriations  shall  be  made  out  of  the  state 
treasury. 

(d)  Further  aid  in  internal  improvements,  such,  for  example 
as  the  rebuilding  of  canals  and  aid  in  constructing  highways,  which 
aid  under  a  late  Ohio  law  amounts  to  50  per  cent  of  the  cost  of  the 
road. 

(e)  Expenditures  for  other  institutions,  such  as  penal,  reforma- 
tory, and  charitable,  which  in  many  states  total  large  sums  yearly. 

Thus  it  seems  that,  owing  to  the  increasing  solidarity  of  state 
interests,  the  state  will  assume  in  the  future  many  new  lines  of  activity, 
which  will  call  for  increased  expenditures;  and  to  meet  these  the 
states  will  have  to  abandon  such  a  great  reliance  on  the  present 
outgrown  general  property  tax. 

In  1840,  21 .  79  per  cent  of  our  population  was  engaged  in  agricul- 
ture, while  in  1900  only  13.64  per  cent  was  so  engaged.  In  1850, 
4.12  per  cent  of  our  population  was  engaged  in  manufacture  and 
the  mechanical  arts,  while  in  1900  this  had  risen  to  9.28  per  cent 
which  would  seem  to  indicate  a  shifting  of  the  population  to  the 
cities. 

This  aggregation  of  population  within  limited  areas  has  meant  a 
continually  nicer  adjustment  of  individual  to  individual;  for  so 
compUcated  and  numerous  are  the  relations  of  a  city  dweller  to  his 
fellow,  that  those  who  will,  do,  and  those  who  will  not,  must  be  made 
to,  recognize  the  limits  of  personal  action,  in  order  that  all  may 
enjoy  the  larger  privileges  which  come  from  collective  activities  and 
expenditures.    All  this  has  meant  and  will  mean  in  the  future  the 


PUBLIC  FINANCE  AND  TAXATION  827 

taking  over  by  the  city  of  many  activities  which  could  formerly  be 
left  to  the  individual. 

Sanitation  and  inspection  is  but  one  of  these  new  activities, 
which  has  had  a  remarkable  development  during  the  last  decade 
and  will  doubtless  have  a  much  greater  one  in  the  future;  for  when 
it  is  realized  what  a  vast  work  there  is  to  do  in  this  field,  we  may 
well  hope  that  the  sanitary  policeman  will  soon  be  a  more  important 
official  than  the  peace  and  order  one  of  today.  Without  further 
statement  of  the  well-known  fact  that  local  expenditures  have  grown 
rapidly,  we  may  take  up  the  discussion  of  several  questions  which 
suggest  themselves. 

First,  expenditures  are  increasing  more  rapidly  than  population. 

Second,  since  1890  municipal  debts  have  been  increasing  more 
rapidly  than  population,  and  on  this  point  it  may  be  remarked 
that  while  theoretically  the  municipal  citizen  will  admit  that  he 
ought  to  pay  for  what  he  uses  and  enjoys,  yet  this  is  not  always  done, 
and  as  a  result  the  present  generation  is  paying  for  the  necessities 
and  conveniences  enjoyed  by  the  past  generation  and  leaving  the 
coming  generation  to  pay  for  much  of  what  it  is  now  enjoying.  That 
this  is  true  is  due  to  two  facts:  first,  it  is  much  of  a  relief  to  present 
purses  to  place  the  burden  on  the  future,  and  this  is  made  possible 
by  the  financial  system;  and  second,  it  is  often  impossible  to  calculate 
the  lifetime  of  a  public  work.  The  plant  may  prove  too  small; 
mistakes  in  construction  and  use  of  material  may  easily  be  made. 

Third,  assessed  valuation  tends  to  increase  more  rapidly  than 
population,  but  less  rapidly  than  expenditures.  Hence  the  general 
property  tax  is  not  an  adequate  or  satisfactory  source  of  revenue 
for  growing  cities,  unless  the  rate  of  taxation  is  increased,  and  the 
statistics  given  show  that  the  rate  has  decreased.  A  decreased  tax 
rate,  whether  it  represents  an  apparent  or  a  real  saving,  is  one  of  the 
best  means  for  the  political  "boss,"  who  is  so  powerful  in  city  affairs, 
to  secure  votes. 

Fourth,  there  must  be  an  increase  in  receipts  from  sources  other 
than  the  general  property  tax  in  order  to  meet  these  increased  expendi- 
tures. There  is  doubtless  a  great  waste  in  city  expenditures,  but  it 
is  questionable  whether  any  considerable  portion  of  this  is  due  to 
"graft,"  as  is  popularly  supposed.  Doubtless  a  much  greater  portion 
of  the  waste  comes  from  a  failure  to  imderstand  the  economic  and 
social  work  which  the  modem  city  is  called  upon  to  do  through  its 
officials  and  employees.     Cities  have  grown  so  rapidly  that  we  have 


828 


MATERI.AXS  FOR  ELEMENTARY  ECONOMICS 


failed  to  devise  methods  to  meet  the  problems  resulting  from  this 
rapid  growth.  In  the  United  States  the  average  citizen  has  given 
little  attention  to  city  government  and  problems,  preferring  to  give 
his  time  to  his  private  business  and  permitting  the  public  business 
to  be  done  by  the  ignorant  and  dishonest,  with  the  result  that  he 
knows  but  imperfectly  what  is  secured  for  money  expended. 


239.    FEDER.\L  EXPENDITURES  (ORDINARY)  1800-1911' 
(Figures  are  in  millions  of  dollars) 


o 
o 
00 


1,300 
1,200 

1,100 
1,000 

QOO 

800 

700 
600 

500 

400 

300 

200 

100 


00 


00 


O 
CO 

CO 


o 
■* 

00 


o 
00 


o 

00 


o 

00 
00 


o 

On 

00 


o 
o 


o- 


M                     » 

-1                   h 

H                    1 

-4                  W 

HI 

/ 

1 

/ 

I 

V 

V. 

r 

^v 

-A^r 

->^ 

^ 

1,300 

1,200 
1,100 

1,000 

900 

800 

700 
600 
500 

400 

300 

200 
100 


'  The  data  are  taken  from  the  Statistical  Abstract  of  the  United  States  and  the 
Annual  Report  of  the  Secretary  of  the  Treasury. 


PUBLIC  FINANCE  AND  TAXATION 


829 


240.    THE  COST  OF  GOVERNMENT,  NATIONAL,  STATE,  AND 

LOCAL- 

I.    NATIONAL 

Receipts  OF  the  United  States  from  Different  Soxtrces  in  1911,  Measured 

BY  Pee  Cent  of  Total,  by  Area,  and  by  Population,  As  Shown  by 

the  Census  of  1910.    Fiscal  Year  Ending  June  30,  1911 


Source  of  Receipts 


Per  Cent  of 
Total 


Per  Square 
Mile* 


Per  Capitaf 


n. 


in. 


IV. 


V. 


General  revenues  as  follows; 
a)  From  taxes  and  licenses — 
i)  Customs 

2)  Internal  revenue 

3)  Corporation  excise 

4)  Bank  note  tax 


5-6)  Other  taxes. 


b) 


Total  taxes  and  licenses. 

From  fees,  fines,  and  penalties  . . . 


Total  coercive  revenues . 
c)  From  gifts  and  indetunities 


Total  general  revenues 
Commercial  revenues,  as  follows: 
a)  From  departmental  earnings — 

i)   Profits  on  coinage 

a)  Panama  canal,  sales,  etc. . . . 

3)  Other  sales,  rentals,  etc 


Total  departmental  earnings . 
b-d)   From  lands,  forests  and  sealskins  . . , 

e)  From  postal  service 

/)  From  interest 


b) 
c) 
d) 


Total  commercial  revenues . 

Total  revenue  receipts 

Non-revenue  receipts,  as  follows; 

a)  Offsets  to  outlays  (realty  sales) 

Panama  bonds 

Transfers  and  refunds 

Agency  and  trust  transactions — 

i)  National  bank  note  fund 

2)  Trust  fimds 


Total  non-revenue  receipts.. 

Receipts  from  local  sources,  as  follows : 

a)  Alaska  fund  and  game  licenses 

b)  District  of  Columbia  fund 


Total  from  local  soiu'ces 
Net  receipts  unclassified 


Total  Receipts 


31526 

28.971 

3-360 

0.351 
0.369 


$105.75 

97.18 

11.27 

i.i8 

1.24 


64-577 

1.062 


S216.62 

356 


65  639 

0.068 


$220.18 

•23 


65.707 


0.529 
0.158 
0.209 


$220.41 


77 
53 
71 


0.896 

0.999 

23  845 
0.061 


3 

3 
79 


25.801 
91  508 

o.  114 
1.768 
0.637 

4  033 
1. 198 


S  86 
306 


5 

2 

13 

4 


7-750 


0.018 
0.708 


$26 


01 

35 
99 
20 


55 
96 

38 
94 
13 

53 
02 


00 


.06 

2.38 


0.726 

0.016 


$2.44 
•OS 


$3-42 

3-14 

•36 

.04 

•04 


$7.00 
.12 


$7.12 
.01 


$7  13 


.06 
.02 
.02 


;  .10 

.11 

2.58 

.01 


$2.80 

9  93 

.01 
.19 
•07 

•44 
-13 


$    .84 


.00 
.08 


S   .08 

.00 


100.000 


$335  45 


$10.85 


•  Based  on  land  area  exclusive  of  outlying  possessions  {j,973,8qo  square  miles). 
t  Based  on  census  of  1910  exclusive  of  outlying  possessions  (91,972,366  population). 

'  From  E.  V.  D.  Robinson,  "The  Cost  of  Government  in  Minnesota,"  in  th« 
Third  Biennial  Report  of  the  Minnesota  Tax  Commission  (1913),  pp.  267-95. 


8.^o 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Payments  of  the  United  States  for  Different  Purposes  in  191  i,  Measxjred 

BY  Per  Cent  of  Total,  by  Area,  and  by  Population,  As  Shown  by 

THE  Census  of  1910.    Fiscal  Year  Ending  June  30,  191 1 


Purpose  of  Payment 


Per  Cent  of  Per  Square      Per 
Total  Mile*       Capitaf 


L   Government  in  general,  as  follows: 

1.  Legislation — 

c)  Congress 

b)  Congressional  commissions 

c)  Public  printing  oflBce 

d)  Library  of  congress 

e)  Other  legislative  expenses 

Total  for  legislation 

2.  Administration — 

o)  Executive  proper 

b)  Executive  commissions 

c)  Civil  service  commission 

d)  Executive  departments  (general) — 

i)  Treasury 

2)  Interior 

3)  Public  buildings 

Total  for  administration 

Total  for  government  in  general . . 
n.   Protection  of  life  and  property,  as  follows: 

1.  Preservation  of  the  peace — 

a)  National  defense — 

i)  Foreign  afifairs 

2)  Army  and  navy 

b)  Courts  and  crimes 

Total  for  preservation  of  the  peace 

2.  Safeguarding  public  health  and  safety 

3.  Regulation  of  industry  in  public  interest .  .  . 

Total  for  protection  of  life  and 

property 

in.  Promotion  of  efficiency  as  follows: 

1.  Public  works — 

a)  Irrigation  and  drainage 

b)  Highways 

c-d)  Inland  canals,  rivers  and  harbors 

e)  Panama  canal 

/)  Telegraph  and  cable  lines 

Total  public  works 

2.  Other  aids  to  private  industries 

3.  Scientific  investigation  and  publication  . . . . 

4.  Education 

5.  Recreation 

6.  Soldiers'  homes  and  pensions 

7.  Indian  service 

Total  for  promotion  of  efficiency. 


0.733 
0.013 
0.564 
0.067 
0.032 


I  409 

0.022 
0.026 
0.029 

2.468 
0.394 
2.157 


5  096 

6  505 


0.247 

24.554 
0.986 


25  787 

1. 411 
0.469 


27.667 


0.834 
0.021 
3.48s 

3.84s 
0.029 


8.214 

1. 137 
1.272 
0.756 
0.037 
16.920 
0.675 


29  on 


12. 37 

.04 

1.84 

.22 

.  10 


«4  57 

•07 
.08 

■09 

8.00 
1.28 
7.00 


$16  52 
21.09 


.80 

79.60 

3.20 


$83.60 

4-57 
1.52 


$89  69 


2.70 

•07 

11.30 

12.47 

•09 


$26  63 

3-69 
4.12 

2.4s 
.12 

54.8s 
2. 19 


$   .08 

.00 
.06 
.01 
.00 


$    .15 


.00 
.00 
.00 

.26 
.04 
•23 


53 
.68 


•03 

2-57 
.  10 


$2.70 

.15 
.05 


$2. 90 


.09 
.00 

•37 
.40 
.00 


(  .86 
.12 

■13 
.08 
.00 
1.78 
•07 


S94  05     $3  04 


*  Based  on  land  area  exclusive  of  outlying  possessions  (3,973,8go  square  miles), 
t  Based  on  census  of  loio  exclusive  of  outlying  possessions  {oi,oji,af>6  population). 


PUBLIC  FINANCE  AND  TAXATION  831 

Paymejjts  of  the  United  States  by  Area  and  Population — Continued 


Pxirpose  of  Payment 

IV.  Public  services,  as  follows: 

1-2.  Public  lands  and  forests 

3.  Mints  and  currency 

4.  Postal  savings  banks 

5.  Postal  service 

Total  for  public  services 

V.  Local  governments 

Total  for  maintenance  and  per 

manent  improvements 

VI.  Interest  on  public  debt 

Vn.  Principal  of  public  debt 

Vni.  Transfers,  refunds,  agency  and  trust  payments 

Total  Payments 


Per  Cent  of 
Totol 


Per  Sqtiare 
MUe 


0.995 

O.4S4 

0.006 

24  834 


26.319 

1.199 


90.701 

2. 211 

3  654 
3-434 


100.000 


3- 23 

I-S7 
.02 

80.50 


$85.32 
389 


S294 . 04 

7.17 

11.84 

II. 13 


$324.18 


Per 
Capita 


.lO 

•OS 

.00 

2.61 


$2.76 

•13 


$9  51 
•23 

.38 
.36 


S10.48 


II.    STATE  (MINNESOTA) 
Total  Receipts  of  the  State  of  Minnesota  in  1911 


3»4Z 


^.seX  *«* 


832 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Payuents  of  the  State  of  Minnesota  in  iqii  by  Purposes,  Measured  by 
Per  Cent  of  Total,  by  True  Valuation,  and  by  Population 


Items 


L    State  government  in  general 

IL    Protection  of  life  and  property: 

1.  Preservation  of  the  peace — 

a)  Courts 

b)  Militia 

c)  Correctional  institutions 

Total  preservation  of  the  peace 

2.  Preservation  of  public  health — 

a)  Against  disease 

b)  Against  accident 

c)  Against  impure  food 

Total  preservation  of  public  health 

3.  Protection  of  property  against  natural  agencies- 
o)  Against  fire 

b)  Against  floods 

c )  Against  animals  and  disease 

Total  protection  against  natural  agencies 

4.  Regulation  of  industry — 

a)  Transportation  and  exchange 

b)  Grain  and  hay  inspection 

c )  Bureau  of  labor 

Total  for  regulation  of  industry 

Total  protection  of  life  and  property .  . . 
ni.    Promotion  of  efficiency: 
I.  Public  works — 

o)  Transportation 

b)  Forest  reserves 

Total  for  public  works 

a.  Boxmties  and  grants  for  industries 

3.  Bureau  of  immigration 

Total  physical  efficiency 


Per  Cent 
of  Total 


4  391 


1.663 
0.699 
7-734 


Per 

$10,000 
True  Val- 
uation 


10.096 

0.965 
0.072 
0.506 


I  543 

2.401 
1. 124 
0.516 


4.041 

0.797 
1.700 
0.222 


2.719 
18.399 


0.667 
0.022 


0.689 

0.490 
o.  121 


1.300 


$1.95 


$4 


$1 


$1 
8 


50 

43 
03 
23 


80 

35 
75 
10 


20 
19 


•30 
.01 


$  .31 

.22 

•05 


$  .58 


Per 

Capita 


«    35 


•13 

.06 
.61 


S  .80 

.08 
.00 
.04 


S    .12 

.19 
.09 
.04 


$    .32 

.06 

•13 
.02 


$    .21 

I  45 


•OS 
.00 


$  .05 

.04 
.01 


S  .10 


PUBLIC  FINANCE  AND  TAXATION  833 

Payments  of  State  of  Minnesota  in  1911  by  Purposes — Continued 


Items 


Per  Cent 
of  Total 


Per 

$10,000 
True  Val- 
uation 


Per 
Capita 


4.  Education — 

a)  In  general 

b)  University 

c)  Agricultural  schools 

d)  (e)  Normal  and  high  schools 

0  (g)  Common  schools 

Total  education 

5.  Libraries 

Total  schools  and  libraries 

6-7.  Art,  monuments,  and  recreation 

8-9.  Compensation  for  injuries,  pensions,  etc 

10.  Humane  and  charitable  institutions 

11.  Unclassified 

Total  for  promotion  of  efficiency 

General  maintenance  and  improvements 
IV.  Commercial  enterprises — 

1.  Dictionary  fund 

2.  State  lands 

3.  Twine  plant 

Total  for  commercial  enterprises 

Total  maintenance  and  improvements  . . 

V.  Interest  paid 

VI.  Paid  on  principal  of  state  debt 

VII.  Transfers,  refunds,  agency  and  trust  fund  pay- 
ments   

Total  Payments 


0.087 

9-955 

1.822 

5-OOI 

18.125 


$  .04 

4-43 
.81 

2.22 
8.06 


34  990 

0.485 


$15  56 


.22 


35  475 

0.756 
1.926 
7.199 
0.028 


$15.78 

•34 

.86 

3.20 

.01 


46.684 
69.474 

0.017 
0.476 
6.662 


$20.77 
30.91 

.01 

.21 

2.96 


7  155 
76 . 629 

0.341 

6.923 

16. 107 


$3  18 
34  09 

•15 

3-o8 

7.16 


100.000 


$44.48 


;  .01 

.78 

•  15 

•39 
1-43 


$2.76 
.04 


$2.80 

.06 
.1 

■57 
.00 


$3.68 
548 


.00 
.04 
•52 


$  .56 

6.04 
03 

•54 

1.27 


$7.88 


834 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


m.    MUNICIPAL 

Receipts  by  Sources  and  Payments  by  Purposes,  Measured  by  Per  Cent 

OP  Total,  by  True  Valuation,  and  by  Population.     Fiscal  Year 

Ending  December  31,  1911,  or  Date  Nearest  Thereto 

Class  I  Cities — Population  above  75,000 
(Includes  Minneapolis,  St.  Paul,  and  Duluth) 


Itkki 


AvESAGK  Three  Cities 
Class  I 


PerCent|P"»'°'?«' 
of  Total  T^/Valu- 

ation 


Per 
Capita 


Receipts: 
L    Revenue  receipts,  as  follows: 
A.  General  revenues — 

o)   From  taxes  (excluding  special  assessments)  . 

b)  From  liquor  licenses 

c)  From  all  other  licenses 

d)  From  fees,  fines  and  forfeits 

e)  From  state  grants  for  schools 

/)  From  state  grants  for  armories  and  fire    de- 
partments   

g)  From  other  grants  and  gifts 

A)  From  other  general  revenues 


41.8 
4.6 
0.4 

o-S 
2.0 

0.4 


$94-74 
10.37 

.98 
1.06 
4.61 

.81 


$14.72 
1. 61 

•IS 
.16 
.72 

.13 


•OS 


.01 


B. 


Total  general  revenues 

Commercial  revenues — 

a)   From  special  assessments 

From  privileges 

From  department  earnings,  rents,  sales,  etc. 

From  educational  institutions 

From  public  service  enterprises 

From  interest 


b) 
c) 
d) 
c) 
f) 


49  7 

8.9 


1.2 

o.  2 
6.8 
1 .0 


Si 12. 62 

20.  II 

.00 

2.60 

•44 

iS-37 

2-33 


$17  50 

3- 13 
.00 
.40 
.07 

2-39 
•36 


n. 


Total  commercial  revenues 

Total  revenue  receipts 

Non-revenue  receipts  as  follows: 

o)  From  offsets  to  outlays 

b)  From  debt  incurred  during  year 

c)  From  transfers,  refunds,  agency  and  trust  collec- 

tions  


18. 1 
67.8 

o.i 
304 

1-7 


$40.85 
153  47 

.19 
68.83 

3-90 


$6.35 
23  85 

•03 
10.70 

.60 


Total  non-revenue  receipts 
Total  Receipts 


33  2 


$72  92 


*"  33 


100.  o 


S226  39 


$35  18 


PUBLIC  FINANCE  AND  TAXATION  835 

Receipts  by  Soukces,  and  Payments  by  FxiRroszs— Continued 


iTKia 


IL 


m. 


IV. 


V. 


*) 


2) 
3) 

4) 
5) 
6) 
7) 


Payments  : 
I.    For  maintenance,  as  follows: 
a)   For  departments — 

i)  Government  in  general 

Protection  of  life  and  property 

Health  and  sanitation  (iacluding  sewers) 

Highways  and  bridges 

Charities 

Recreation 

Unclassified 

For  educational  institutions — 

1)  Public  schools 

2)  Library,  etc 

For  public  service  enterprises 


Total  for  maintenance 

For  interest  (including  state  loans),  as  follows: 

a)  On  department  debt 

b)  On  educational  debt 

c)  On  debt  for  public  service  enterprises 


AVEILAGE  ThSEK  CiTIZS 

CJJiSS  I 


Per  Cent 
of  Total 


Per$io,ooo 
True  Valu- 
ation 


Total  for  maintenance  and  interest . . . 
For  outlays  for  permanent  improvements,  as 
follows: 
a)   For  departmental  operations — 

i)   Government  in  general , 

Protection  of  life  and  property , 

Health  and  sanitation  (including  sewers)  .  .  , 

Highways  and  bridges 

Charities , 

Recreation 

Unclassified 

For  educational  institutions — 

i)  Public  schools 

2)  Library,  etc 

For  public  service  enterprises 


b) 


2) 
3) 
4) 
5) 
6) 
7) 


c) 


Total  for  permanent  improvements. . 
Paid  on  principal  of  debt,  as  follows: 

a)  Bonds  (including  state  loans) 

b)  Temporary  loans 

c)  Warrants  of  previous  years 

Transfers,  refunds,  agency  and  trust  payments. 

Total  Payments 


2.4 

12.9 

4 

3 
I. 
I. 
o 


15.0 

I.O 

4.0 


45  4 

4-2 

1-4 
1.6 


$5.22 
28.16 
8.65 
7.17 
2.58 
3-4S 
•30 

32.72 
2.25 
8.82 


$99  32 

9.17 
3  04 
341 


52  6 


0.1 

0.3 

4.6 

6.3 
0.6 

3-5 
0.4 

6.4 
0.2 

4-1 


26  5 
1-4 

II. o 

6.0 

2  5 


100. o 


$114.94 


.02 

•75 
10.15 

13-78 
^■33 
7.61 

.64 

14.02 

•52 
9.02 


Per 

Capita 


$   .81 

438 

I  34 

I. II 

.40 

•54 

•OS 

S08 

•35 

i^37 


$15  43 

1.42 
•47 
•54 


$17.86 


$57  84 

3^" 

24.02 

13  23 
5  43 


$218.57 


,00 
,12 

.58 
.14 
.21 
,18 
.10 


2.18 

.08 

1.40 


$8  99 

.48 

373 
2.06 

•85 


$33  97 


836  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

IV.    SUMMARY  VIEW 

Section  I  of  Table  I  gives  total  payments  for  all  purposes,  includ- 
ing transfers  within  and  between  governmental  units.  As  a  result  of 
such  transfers,  it  invoK^es  duplications  amounting  to  some  40  million 
dollars.  This  is  the  method  by  which  the  sensational  estimates  of 
cost  of  government  have  been  made,  that  have  attracted  considerable 
attention  from  time  to  time. 

Section  II  presents  net  payments,  excluding  transfers  within 
governmental  units  and  counting  transfers  between  units  but  once 
— in  the  books  of  the  organization  which  finally  spent  the  money. 

This  division  of  the  table  is  of  interest  chiefly  as  showing  the  relative 
extension  of  functions  of  the  several  grades  of  government.  It  is 
significant  and  highly  characteristic  of  the  United  States  that  nearly 
two-thirds  (63 . 8  per  cent)  of  the  net  expenditures  were  made  by  the 
local  county  governments,  leaving  only  12.4  per  cent  for  the  state 
and  23 .8  per  cent  for  the  United  States. 

These  figures  would  seem  to  indicate  that,  while  the  ratio  may 
be  somewhat  different  in  other  states,  the  usual  assumption  that  the 
federal  government  accounts  for  forty  per  cent  of  the  total  govern- 
mental expenditures  is  no  longer  tenable.  Twenty-five  per  cent 
would  probably  be  nearer  the  mark. 

Section  III  of  Table  I  shows  the  net  cost  to  taxpayers  of  a\l 
grades  of  government,  as  measured  by  total  coercive  revenues.  Like 
section  II  this  section  excludes  transfers  within  units,  but  unlike 
section  II  it  also  excludes  commercial  revenues  and  counts  transfers 
between  governmental  units  in  the  books  of  the  grantor  rather  than 
the  grantee,  and  then  only  in  so  far  as  paid  out  of  coercive  revenues. 
For  example,  the  one  mill  school  tax  levied  by  the  state  is  charged 
to  the  state,  but  the  interest  and  other  commercial  income  which 
forms  the  larger  part  of  the  state  school  apportionment  is  not  included 
because  it  is  not  a  charge  to  the  tax  payer. 

On  this  basis  the  local  and  county  governments  are  chargeable 
with  57.5  per  cent,  the  state  with  16.4  per  cent,  and  the  federal 
government  with  26.  i  per  cent  of  the  total  cost  of  government. 

The  total  cost  to  the  people  of  Minnesota  is  shown  as  56 . 7  mil- 
lion dollars.  This  sum  was  $151.97  per  $10,000  true  valuation  in 
the  state,  and  $26 .  91  per  capita  (based  on  the  estimated  population 
of  Minnesota  in  191 1).  It  was  also  23 . 6  per  cent  of  the  income  from 
the  total  estimated  wealth  of  the  state  (Table  D)  at  5  per  cent  interest. 


PUBLIC  FINANCE  AND  TAXATION 


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838  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

To  this  cost  of  government  must  of  course  be  added  the  cost  of 
subsidizing  the  protected  interests,  whatever  that  may  be. 

Section  IV  of  Tabfe  I  gives  the  cost  of  all  grades  of  government 
to  a  family  of  five  persons  in  191 1,  assuming  that  the  head  of  the 
family  was  a  householder  or  farmer  owning  real  estate  worth  $3,000 
and  personal  property  worth  $1,000;  and  assuming,  further,  that  the 
property  was  assessed  and  taxed  at  the  average  rates  prevailing  in 
the  state  after  allowing  the  usual  personal  property  exemption. 

The  essential  difference  between  sections  III  and  IV  of  Table  I 
is  that  the  former  includes,  while  the  latter  excludes,  that  portion  of 
the  cost  of  government  which  is  defrayed  by  gross  earnings  taxes, 
liquor  and  other  licenses,  fees,  fines  and  penalties.  In  other  words, 
the  head  of  this  particular  family  did  not  own  railroad  stock,  or  con- 
duct a  saloon,  or  become  liable  to  fines  or  penalties.  He  was  simply 
an  average  law-abiding  citizen  who  paid  direct  taxes  on  real  and 
personal  property  to  the  local,  county,  and  state  governments,  and 
indirect  taxes  to  the  federal  government.  The  question  is,  how  much 
did  he  pay  for  these  several  purposes  ? 

Accepting  the  rates  of  tax  levy  for  different  grades  of  govern- 
ment shown  on  the  state  auditor's  abstract  of  tax  lists,  as  indicating 
the  division  of  the  taxes  paid,  it  appears  that  this  citizen  paid  direct 
taxes  as  follows:  to  the  local  government,  $24.41,  to  the  county 
government,  $6.08,  to  the  state  government,  $4.59;  and  that  he 
also  paid  to  the  United  States  government  as  indirect  taxes  $35.05. 
The  total  cost  of  government  for  the  family  of  five  persons  was  thus 

$70.13- 

In  order  to  show  more  clearly  the  relations  of  these  several  govern- 
mental costs,  the  figures  in  section  IV  of  Table  I  are  embodied  in 
several  diagrams.  In  all  of  these  the  several  segments  of  the  circle 
correspond  in  size  with  the  amounts  shown  in  dollars  and  cents, 
while  the  figures  on  the  circumference  indicate  what  per  cent  each 
amount  is  of  the  total. 

Diagram  i  shows  the  amounts  paid  by  the  head  of  this  family 
of  five  for  different  units  of  government,  and  the  per  cent  which  each 
is  of  the  total.  Over  half  the  total  went  to  the  federal  government, 
and  most  of  the  remainder  to  the  local  governments,  leaving  but 
15. 2  per  cent  for  the  county  and  state  combined. 

Diagram  2  shows  how  the  $4.95  paid  by  the  head  of  the  family 
for  state  purposes  was  allotted  to  the  various  funds.  This  distri- 
bution was  computed  on  the  proportion  of  the  total  state  levy  of 


PUBLIC  FINANCE  AND  TAXATION 


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840  MATERIALS  FOR  ELEME^^^ARY  ECONOMICS 

3  .  88  mills  specifically  made  for  each  fund.  Unfortunately,  time  did 
not  permit  the  further  subdivision  of  these  allotments. 

On  this  basis  the  amount  which  the  head  of  this  family  of  five, 
owning  $4000  worth  of  property,  paid  into  the  state  revenue  fund, 
was  $2.24,  state  school  fund,  $1.18,  road  and  bridge  fund,  $0.30, 
prison  building  fund,  $0.30,  university  fund,  $0.27,  campus  fund, 
$0. 18,  and  soldiers'  relief,  $0.12. 

Diagram  3  shows  how  the  $35.05  paid  by  the  head  of  the  family 
to  the  federal  government  was  spent.  This  distribution  was  made 
in  proportion  to  the  net  federal  expenditures  after  offsetting  com- 
mercial and  other  non-coercive  receipts  against  the  corresponding 
payments. 

On  this  basis  national  defense  took  $12 .  91  out  of  the  $35 .05  con- 
tributed. Pensions  claimed  $8.87,  public  works,  $4. 14,  government 
in  general,  $3.19,  debt  and  interest,  $2.04,  promotion  of  eflSciency 
other  than  by  public  works,  $2.00,  protection,  aside  from  military, 
$1 .  50,  and  sundry,  $0 .  40. 

It  will  be  noted  that  after  eliminating  commercial  £tnd  other 
non-coercive  revenues  and  expenditures,  as  is  done  in  this  diagram, 
the  expenditure  for  defense  amounts  to  36.83  per  cent  of  the  total, 
pensions  25.32  per  cent,  debt  and  interest,  5.83  per  cent,  making  ;i 
total  of  67.98  per  cent  chargeable  chiefly  to  wars  past  and  wars  U> 
come 


PUBLIC  FINANCE  AND  TAXATION 


841 


241.    TOTAL  DEBT  OF  THE  UNITED  STATES,  NATIONAL, 

STATE,  AND  LOCAL' 


TOTAL    2,789,990,120 

TOTAL  DEBT  OF  TH 

LESS-  SINKI! 

E  UNITED 

MG    FUND 

1880 

ST 

ATES 

1870 

NATIONAL 
2,331,169,956 

« 

1902 

NATIONAL 
1,919,326,748 

01 

CO 

< 

0 

NATIONAL 
925,011,637 

1890 

H 
0 

NATIONAL 
851,912,752 

in 
in 

s 
s 

m 

-J 
< 
H 
0 

H 

STATE 
234,908,873 

COUNTY 
196,564,619 

MUNICIPAL 
1,387,316,976 

STATE 
211.210.487 

STATE 
274.745,772 

COUNTY 
145,048,045 

COUNTY 
124,105,027 

STATE 
352,866,698 

MUNICIPAL 
7+4,239,610 

MUNICIPAL 
706,847,166 

COUNTY 
187,565.540 

MUNICIPAL 

AND 

SCHOOL  DISTRICT 
328.244,520 

SCHOOL  D1STB.CT  *B,1«B,0H 

SCHOOL  DitTRiCT  10,701 ,8*8 

U-ixu  »..T.«T    l,..«l.... 

'  From  the  Special  Report  of  the  U.S.  Census  Office,  Wealth,  Debt,  and  Taxor 
Hon  (1907),  p.  135- 


842 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


242.    PUBLIC  DEBT  OF  THE  UNITED  STATES,  1791-1911' 
(Figures  are  in  millions  of  dollars) 

"QOOOOOOOOOO  o 


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2,500 

2,000 

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L 

\ 

\ 

t 

500 

\ 

J 

V. 

--^ 

1 

' 

2,500 


2,000 


1,500 


1,000 


500 


This  table  shows,  historically,  the  amount  of  the  public  debt 
exclusive  of  legal-tender  notes,  gold  and  silver  certificates,  treasury 
notes,  etc.,  and  without  deduction  of  the  amount  of  cash  in  the 
Treasury. 

'  The  figures  up  to  1855  are  taken  from  Plate  IV  of  the  U.S.  Census  Report  on 
Valuation,  Taxation,  and  Public  Indebtedness  (1884).  Subsequent  figures  are  the 
figures  of  "Total  Interest-bearing  Debt"  as  tabulated  in  the  Annual  Report  of  the 
Secretary  of  the  Treasury. 


PUBLIC  FINANCE  AND  TAXATION 


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PUBLIC  FINANCE  AND  TAXATION 


84s 


Cash  in  the  Teeasuhy  and  Cubhent  LiABiLrriES 

GENERAL   FUND 


Assets 
Cash: 

In  Treasury  Offices- 
Gold  Com 

Gold  Certificates 

Standard  Silver  Dollars 

Silver  Certificates 

United  States  Notes 

Treasury  Notes  of  1890 

Certified  Checks  on  Banks 

Federal  Reserve  Notes 

National-Bank  Notes 

Subsidiary  Silver  Coin 

Fractional  Currency 

Minor  Coin 

Silver  Bullion  (available  for  subsidiary  coinage) 

Total 

In  National-Bank  Depositaries — 

To  Credit  of  Treasurer  United  States 

To  Credit  of  Postmasters,  Judicial  Officers,  etc. 
In  Treasury  Philippines — 

To  Credit  of  Treasurer  United  States 

To  Credit  of  Disbursing  Officers 

Total 


$53,549,470.5* 

34.795.51000 

7.910,351.00 

10,745,012.00 

14,645,022.00 

8,290.00 

474,572.01 

3.758,790.00 

32,629,946.70 

26,397,048.04 

57.00 

2,838,267.68 

4,268,320.32 


$192,020,657.27 

88,274,715.90 
5,055,810.99 

3.998,336.53 
1,950,987.99 


$291,300,508.68 


Liabilities 
Current  Liabilities: 
In  Treasury  Offices — 

Disbursing  officers'  balances 

Outstanding  warrants ^ 

Outstanding  Treasurer's  checks 

Outstanding  interest  checks 

Post  Office  Department  balances 

Postal  Savings  balances 

Judicial  officers'  balances,  etc 

Redemption  fund.  Federal  Reserve  notes 

National-bank  notes:   Redemption  fund 

Retirement  of  additional  circulating  notes — Act  May  30,  1908.  . 

National-bank  5  per  cent  Fund 

Assets  of  failed  national  banks 

Miscellaneous  (exchanges,  etc.) 

Total 

In  N alional-Bank  Depositaries — 

Judicial  officers'  balances,  etc 

Outstanding  warrants 

In  Treasury  Philippines — 

Disbursing  officers'  balances 

Outstanding  warrants 

Net  balance  in  general  fund 

Total 


$52,283 

1.306 

2,322 

292 

5. Ill 

4  494 

8,376 

1,070 

♦19,390 

67,302 

29.423 

4,112 

5.553 


.742.83 
288.15 

235-77 

509. l8 
,293 .  00 
,240. 12 
,017.03 
.324-71 

345-50 
.605.5  s 

267.45 
.879-23 
,618.17 


$201,039,366.69 

5,055,810.99 
102,182.78 

1,950,987.09 
1,126,444.  20 


$209,274,792.65 
82,025,716.03 


$291,300,508.68 


■*  The  "National  Bank  Notes:  Redemption  Fund"  was  established  under  requirement  of  the 
act  of  July  14,  1890,  which  states:  Deposits  made  by  National  Banks  to  redeem  circulating  notes 
shall  be  covered  into  the  Treasury  as  miscellaneous  receipts,  and  the  Treasury  shall  redeem  from  the 
general  cash  the  circulating  notes  which  come  into  its  possession  subject  to  redemption.  The  bal- 
ance of  deposits  shall,  at  the  close  of  each  month,  be  reported  on  the  Monthly  Public  Debt  State- 
ment as  a  debt  of  the  United  States  bearing  no  interest. 

MEMORANDUM   SHOWING   AMOUNTS   DUE    UNITED    STATES    FROM    PACIFIC    RAILROADS    ON   ACCOUNT    OF 
BONDS  ISSUED   IN  AID   OF  THEIR  CONSTRUCTION 


Name  of  Road 

Principal 

Interest 

Total 

$1,600,000.00 

$2,011,812.98 

$3,611,812.98 

846 


MATERIAL  FOR  ELEMENTARY  ECONOMICS 


Cash  in  thb  Treasury  A^^)  Current  Liabilities — Continued 

THE  CURRENCY  TRUST  FUNDS,  THE  GENERAL  FUND,  AND  THE  GOLD  RESERVE  FUND 


Assets 
Currency  Trust  Funds: 

Gold  Coin 

Gold  Bullion 

Total  Gold 

Silver  Dollars 

Silver  Dollars  of  1890 

Total  Currency  Trust  Funds 

General  Fund: 

Total  Cash  Assets,  as  above 

Gold  Reserve  Fund: 

Gold  Coin 

Gold  Bullion 

Grand  Total  Cash  Assets  in  Treasury 

Liabilities 
Outstanding  Certificates: 

Gold  Certificates  Outstanding 

Less  demand  gold  certificates  received  in  exchange  for  gold  and  order 
gold  certificates 

Net 

Silver  Certificates  Outstanding 

Treasury  Notes  of  1890  Outstanding 

Total  Outstanding  Certificates,  etc 

General  Fund  Liabilities  and  Balance: 

Total  Liabilities,  as  above 

Balance  in  General  Fund,  as  above $82,025,716.03 

Gold   Reserve  (Reserved  against  $346,681,016  of  U.S.  Notes 
and  $2,354,000  of  Treasury  Notes  of  1890) 152,977,036.63 

Total  Net  Balances 


$    846,488,915.00 
327,310,154.00 


$1,173,799,069.00 

493.4S9.ooo  00 

2,254,000.00 


$1,669,512,069.00 

291,300,508.68 

102,977,036. 6» 
50,000,000.00 


$2,113,789,614.31 


$1,217,882,769.00 
44,083,700.0c 


$1,173,799,069  00 

493,459.000.00 

2,254,000.00 


$1,669,512,069.00 
209,274,792.65 

235,002,752.66 


$2,113,789,614.31 


244.    TOTAL  AND  PER  CAPITA  NATIONAL  DEBT  OF  CERTAIN 
COUNTRIES  PRIOR  TO  THE  WAR  OF  1914' 


Countries 


Argentina 

Austria-Hungary 

Belgium 

Brazil 

Bulgaria 

Canada 

ChUe 

China 

France 

German  Empire 
German  States. . 
Italy 


Total  Debt 


S     732,398,000 

1,043/^75,000 

825,518,000 

1,026,312,000 

176,554,000 

544,391,000 

207,704,000 

969,189,000 

6,346,129,000 

1,194,052,000 

3,854,795,000 

2,921,153,000 


Per 

Capita 
Debt 


S84.18 
20.  26 

108.07 
42.22 
37  04 
70.17 

59-0 
2.88 
160.25 
17.87 
57.68 
82.89 


Countries 


Japan 

Mexico 

Netherlands.  .  .  . 
New  Zealand .  .  . 

Roumania 

Russia 

Serbia 

Spain 

Switzerland  .... 

Turkey 

United  Kingdom 
United  States. . . 


Total  Debt 


$1,267,445,000 
226,404,000 
461,649,000 
485,338,000 
316,693,000 

4,536,939,000 
126,232,000 

1,814,270,000 

23,614,000 

675,654,000 

3,443,799,000 

1,103,665,000 


Per 

Capita 
Debt 


$23.92 
14.66 

74-30 

421.30 

41.66 

26.70 

27-31 
90.97 
6.25 
32.80 
74.81 
11.03 


'  Compiled  from  the  Statistical  Abstract  of  the  United  States.  1914,  pp.  692-95. 


PUBLIC  FINANCE  AND  TAXATION 


847 


245.    PRINCIPAL  SOURCES  OF  ORDINARY'  FEDERAL 
REVENUES  BY  DECADES,  1800-1910 


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246.  THE  ADEQUACY  OF  THE  CUSTOMS  REVENUE  SYSTEM' 

In  order  to  attain  perfect  adequacy  the  government  needs  must 
always  be  met  by  revenue  both  as  to  time  and  amount.  Now  under 
the  ordinary  circumstances,  expenditure — the  measure  of  government 
needs — is  reasonably  uniform  from  year  to  year.  Income  must, 
then,  ordinarily  be  sufficient,  but  no  more  than  sufficient,  to  satisfy 
this  uniform  demand.    As,  moreover,  government  demand  rarely 

'  ["Ordinary"  revenues  exclude  receipts  from  loans,  premiums,  Treasury  notes, 
and  from  the  Post  Office  Department. — Editors.] 

*  Adapted  from  Robert  F.  Hoxie,  "Adequacy  of  the  Customs  Revenue  System," 
in  The  Journal  of  Political  Economy,  III,  42-72  (December,  1894). 


848  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

varies  with  the  variation  in  industrial  and  commercial  conditions,  the 
revenue  should  also  be  derived  from  a  stable  source.  Further,  as 
the  very  nature  of  government  operations  constantly  expose  it  to 
sudden  and  unforeseen  expenditures,  it  follows  that  the  public  income 
should  possess  a  high  degree  of  flexibility.  Sufficiency,  stability, 
and  flexibility  are  then  the  principles  of  fiscal  adequacy.  Definitely 
stated,  sufficiency  requires  that  the  income  be  ordinarily  commensurate 
with  the  demands  of  government;  stability,  that  the  income  resist 
all  forces,  not  of  governmental  origin,  tending  to  make  it  vary;  and 
flexibility,  that  it  be  capable  of  accommodation,  with  precision  and 
rapidity,  to  changes  in  the  government  demand. 

(The  detailed  study  of  our  financial  history  which  forms  part  of  the  original 
article  is  here  omitted.  The  following  summary,  used  in  connection  with  the 
chart,  will  make  clear  the  conclusions  reached  by  the  author. — Editors.) 

In  the  historical  survey  a  variety  of  national,  industrial,  and 
commercial  conditions  have  been  encountered,  yet  the  testimony 
throughout  is  strikingly  in  accord.  In  the  first  period  examined, 
1 789-181 2,  while  the  nation  was  yet  in  its  youth,  and  subject  to 
strong  foreign  influences,  the  customs  revenue,  though  on  the  whole 
abundant,  was  found  to  be  uncertain  to  such  an  extent  as  rendered 
it  an  extremely  precarious  base  on  which  to  place  the  public  finances. 
In  the  second  period,  181 2-16,  under  the  stress  of  foreign  war,  the 
financial  policy  based  upon  the  customs  revenue  system  utterly  broke 
down,  as  a  result  of  the  insufficiency  and  inelasticity  of  this  form  of 
income.  The  generally  favorable  conditions  of  the  third  period, 
1816-35,  while  accompanied  by  a  redundancy  of  revenue,  did  not 
insure  the  nation  against  great  instability  of  income,  resulting  from 
transient  industrial  disturbances.  The  fourth  period  under  examina- 
tion, 1835-43,  furnished  a  striking  illustration  of  redundant  customs 
revenue  both  as  effect  and  cause  of  speculative  expansion,  and  of  the 
extreme  instability  of  this  form  of  revenue  in  time  of  acute  commercial 
crisis.  In  the  fifth  period,  1843-60,  under  remarkably  favorable 
general  circumstances,  the  customs  revenue,  though  on  the  whole 
abundant,  still  proved  extremely  sensitive  to  industrial  and  commer- 
cial disturbances.  The  Ci\al  War  period,  1860-69,  served  only  to 
illustrate  on  a  larger  scale  the  defects  of  the  system  that  were  found 
to  characterize  it  in  the  War  of  181 2.  And  finally,  in  the  full  vigor 
of  the  nation,  and  in  time  of  average  prosperity,  1769-93,  this  form  of 
revenue  was  found  to  be  alternately,  according  to  the  transient 
character  of  industrial  and  commercial  conditions,  greatly  in  excess 


PUBLIC  FINANCE  AND  TAXATION 


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8$0  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  and  far  beneath  the  income  necessary  for  the  support  of  the  financial 
operations  of  the  government. 

It  will  be  seen  that  two  factors  are  common  to  all  these  periods,  viz., 
redundancy  of  revenue  in  time  of  commercial  and  industrial  activity, 
and  insufficiency  and  instability  of  revenue  in  time  of  stress  and  depres- 
sion. On  the  whole  it  may  be  asserted,  without  fear  of  contradiction, 
that,  throughout  the  history  of  the  customs  revenue  system  in  the 
United  States,  the  income  from  this  source  has  been  determined,  not 
by  government  need  but,  almost  wholly,  by  the  character  of  temporary 
industrial  and,  more  especially,  temporary  commercial  conditions. 
As  a  consequence,  in  war  the  current  public  income  has  proved  utterly 
insuflSdent,  unstable,  and  inflexible;  in  peace  it  has  shown  itself 
extremely  uncertain,  fluctuating  with  every  crisis  and  even  with  the 
changes  in  the  policy  and  condition  of  foreign  nations;  in  times  of 
prosperity  it  has  forced  upon  the  treasury  embarrassing  surpluses, 
leading  to  extravagant  expenditure,  speculation,  and  crisis;  in  adver- 
sity it  has  left  the  treasury  empty,  necessitating  the  lavish  use  of  the 
public  credit.  Judged  purely  by  these  results,  as  a  main  source  of 
national  income,  customs  duties  must  receive  almost  unqualified 
censure,  compared  with  which  the  aspersions  against  it  as  a  cause  of 
individual  injustice  are  trivial,  and  it  should  at  once  be  discarded  or 
essentially  modified. 

However,  the  foregoing  discussion  has  not  been  exhaustive  enough 
to  justify  the  rendering  of  a  general  verdict.  The  questions,  whether 
any  peculiar  circumstances  have  accompanied  the  employment  of 
the  customs  revenue  system  in  the  United  States  and,  if  so,  whether, 
and  to  what  extent,  these  circumstances,  non-inherent  to  the  use  of 
the  customs  revenue  system,  have  contributed  to  its  unfavorable 
showing,  are  still  before  us. 

A  review  of  the  general  conditions  existing  in  the  United  States 
since  customs  duties  first  became  the  national  revenue  system  reveals 
no  peculiar  circumstances  operating  against  the  successful  employ- 
ment of  this  source  of  public  income.  On  the  contrary,  the  general 
conditions  have  been  remarkably  favorable.  Vigorous  national 
growth,  rapid  industrial  and  commercial  expansion,  and  great  accumu- 
lation of  wealth  have  characterized  the  period.  The  isolated  position 
of  the  country  and  a  conservative  attitude  toward  government  enter- 
prises have  combined  to  render  national  expenditures  on  the  whole 
moderate.  Customs  duties,  moreover,  have  been  used  to  provide 
only  for  federal  expenditures,  the  states  being  expressly  forbidden 


PUBLIC  FINANCE  AND  TAXATION  851 

by  the  Constitution  from  placing  any  duties  on  imports.  And  finally, 
the  people,  upon  whose  approval  the  success  of  any  system  of  taxation 
under  a  democratic  government  must  ultimately  depend,  have 
regarded  indirect  taxes  with  peculiar  favor.  The  failiu-e,  then,  of 
the  customs  revenue  system  to  conform  to  the  requirements  of  fiscal 
adequacy  cannot  be  regarded  as  a  result  of  the  general  conditions 
found  in  the  United  States  in  the  past  century. 

This  conclusion  granted,  there  remains  but  one  other  possible 
source  from  which  circumstances  might  arise  unfavorable  to  the 
success  of  the  system,  viz.,  the  financial  operations  of  the  govern- 
ment. Here,  indeed,  two  peculiar  and  unsatisfactory  features  are 
found  to  exist.  They  are,  first,  a  faulty  financial  organization;  and 
secondly,  a  continued  administration  of  the  customs  revenue  system 
for  economic  rather  than  fiscal  purposes.  That  these  features  of 
American  finance  have  been  responsible,  to  some  extent  at  least,  for 
the  unfavorable  showing  of  the  customs  revenue  system  in  the  United 
States  cannot  be  questioned. 

The  particular  feature  of  our  financial  organization  that  has 
unfavorably  affected  the  customs  revenue  system  is  a  division  of 
powers  and  responsibilities  in  the  construction  of  the  national  budget. 
There  is  in  our  government  no  single  eye  that  surveys  and  no  single 
responsible  head  that  dominates  the  budgetary  operations.    The 
financial  estimates  are,  indeed,  prepared  under  the  supervision  of  one 
person — the  Secretary  of  the  Treasury.    But,  this  operation  completed, 
his  power  and  his  responsibility  pass  over  into  the  hands  of  the  legis- 
lature.   There  is  a  positive  line  of  separation  between  the  executive 
and  legislative  departments.    The  Secretary  of  the  Treasury  may 
recommend,  but  he  cannot  enter  the  legislative  chamber  to  explain 
or  defend  his  position.     Congress  has  unlimited  power  to  add  to, 
or  take  from,  the  estimates  and  to  establish  whatever  taxation  it  may 
deem  proper.    The  financial  measures,  therefore,  in  fact,  come  from 
the  legislature  itself.    But  even  in  the  legislature,  working  by  means 
of  conmiittees,  expenditure  and  taxation  are  not  considered  together 
as  forming  one  problem;  and  further,  Congress  is  composed  of  many 
individuals,  with  widely  differing  financial  abilities,  influenced  mainly 
by  other  than  financial  motives. 

The  second  peculiar  feature  of  American  financial  operations  is 
the  predominance  of  the  protective  idea  in  the  shaping  of  the  revenue 
system  itself.  The  attempt  to  foster  home  industry  by  means  of  high 
duties  on  imported  merchandise  is  not,  of  course,  a  novel  feature  of 


8S2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

financial  legislation,  but  in  the  United  States  fiscal  considerations  have 
been  pretty  systematically  subordinated  to  the  protective  aim. 
This  result  has  been  due  mainly  to  three  causes:  first,  the  faulty 
financial  organization  already  discussed,  which  places  fiscal  manage- 
ment in  the  hands  of  men  dominated,  to  a  great  extent,  by  poHtical 
and  economic  motives;  secondly,  the  great  wealth  of  the  country 
which,  rendering  public  borrowing  easy,  and  enabling  the  nation  to 
recover  rapidly  from  the  effects  of  financial  blunders,  has  veiled  the 
real  importance  of  fiscal  considerations;  and  thirdly,  the  presence, 
during  almost  eighty  years  of  our  national  history,  of  a  public  debt 
readily  absorbing  surplus  revenues. 

The  discussion  of  the  peculiar  circumstances  affecting  the  customs 
revenue  system  in  the  United  States  has,  then,  considerably  modified 
the  broad  general  conclusion  drawn  purely  from  the  historical  exami- 
nation. But,  though  the  scope  of  the  general  conclusion  has  been 
narrowed,  and  has  been  rendered  also  somewhat  equivocal,  this 
discussion  serves  only  to  confirm  in  all  its  force  the  practical  con- 
clusion that  the  customs  revenue  system  should  be  either  discarded 
or  essentially  modified.  It  has  shown  that  not  only  is  the  revenue 
system  in  itself  essentially  faulty,  but  that  the  incidental  causes  of 
its  inefficiency  in  the  United  States  lie  too  deep  in  the  structure  of 
our  government  and  in  the  character  of  our  people  to  be  easily  eradi- 
cated. It  will  take  much  time  to  displace  the  financial  methods 
sanctioned  by  a  century  of  use,  and  still  longer  to  convince  the  people 
that  the  tariff  is  not  essentially  bound  up  with  the  protective  policy. 
It  may  be  assumed,  then,  that  the  results  to  be  derived  from  the  con- 
tinued use  of  this  revenue  system  will  be  as  unsatisfactory  in  the 
future  as  in  the  past.  But  the  effect  upon  the  prosperity  of  the  nation 
caiiiiot  but  be  even  more  disastrous.  As  we  approach  European 
conditions,  industrial  enterprise  becomes  more  sensitive,  and  our 
ability  to  recover  rapidly  and  easily  from  the  effects  of  financial 
blunders  grows  less.  It  is  imperative  that  the  national  revenue 
system  in  itself  be  made  more  flexible  and  more  stable.  It  is  for  us 
to  consider  carefully  what  measures — whether  the  introduction  of  the 
income  tax,  or  the  extension  of  the  internal  revenue  duties — will  bring 
about  these  results. 


PUBLIC  FINANCE  AND  TAXATION  853 

247.   SOME  GENERAL  DIFFICULTIES  IN  OUR  STATE  SYSTEMS 

OF  TAXATION' 

What,  then,  are  the  chief  difficulties  in  our  tax  system  which 
are  coming  more  and  more  to  be  recognized  everywhere  through- 
out the  length  and  breadth  of  the  land?  I  should  sum  them  up 
under  eight  heads. 

First  and  foremost  is  the  breakdown  of  the  general  property 
tax,  which  is  almost  everywhere  still  the  chief  reliance  of  state  and 
local  government.  The  general  property  tax  works  well  only  amid 
most  primitive  economic  conditions  for  which  alone  it  was  calculated. 
Almost  everywhere,  for  reasons  which  it  is  unnecessary  here  to  re- 
capitulate, and  which  it  is  utterly  impossible  to  prevent,  personalty 
is  slipping  from  under.  The  administration  of  the  general  property 
tax  is  everywhere  attended  with  increasing  difficulty,  and  in  our 
large  industrial  centers  it  has  become,  to  use  the  words  of  a  recent 
tax  report,  "a  howling  farce."  Everywhere,  north  and  south,  east 
and  west,  although  in  varying  degree,  comes  the  cry  that  the  attempt 
to  enforce  the  general  property  tax,  whether  by  listing  bills  or  tax 
ferrets,  by  oaths  or  by  inquisitors,  is  doing  much  to  force  upon  the 
average  citizen  habits  of  falsehood  and  corruption. 

Second,  a  growing  lack  of  equality  in  tax  burdens,  not  only  as 
between  classes  in  the  community,  but  as  between  individuals  of  the 
same  class.  Where  land,  for  instance,  is  assessed  at  20  per  cent  of 
its  value  in  certain  counties,  and  at  80  per  cent  or  100  per  cent  in 
other  counties,  it  is  obvious  that  the  contribution  to  the  state  tax 
is  grossly  unequal  and  unfair. 

Third,  the  application  to  general  purposes  of  what  was  intended 
to  be  only  a  local  revenue.  All  direct  taxation  was  originally  local 
in  character,  and  the  assessment  of  property  for  local  taxation  was 
at  the  outset  a  comparatively  simple  matter.  When  the  need  for 
state  revenues  made  itself  felt,  it  was  obviously  expedient  to  tack  on 
to  this  local  taxation  a  quota  for  general  purposes.  But  with  the 
great  development  of  state  functions,  and  with  the  breakdown  of  the 
local  barriers  of  commerce  and  industry,  what  was  originally  equal 
soon  turned  into  inequality,  and  the  attempt  to  fetter  interlocal 
or  even  interstate  business  conditions  by  the  bonds  of  purely  local 
assessment  has  proved  to  be  a  fruitful  source  of  difficulty. 

■From  E.  R.  A.  Seligman,  "The  Separation  of  State  and  Local  Revenues,"  in 
State  and  Local  Taxation,  Addresses  and  Proceedings  of  the  First  National  Confer- 
ence of  the  National  Tax  Association  (1907),  pp.  486-89.    The  Macmiilan  Co.,  1908. 


8S4  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

Fourth,  the  failure  to  make  modern  corporations  bear  their 
fair  share  of  taxation.  The  corporation  is  a  growth  of  the  last  half 
century.  It  was  unknown  when  the  present  framework  of  our  tax 
system  was  established.  The  attempt  to  force  the  new  wine  into 
the  old  bottles  is  not  only  spoiling  the  wine,  but  cracking  the  bottles. 

Fifth,  the  failure  to  secure  adequate  compensation  from  indi- 
viduals and  corporations  alike  for  the  franchises  and  privileges  that 
are  granted  by  the  community.  An  earnest  effort  is  being  made  at 
present  throughout  the  length  and  breadth  of  the  land  to  repair 
this  defect.  But  with  the  historic  system  as  it  has  come  down  to  us 
in  this  country  of  estimating  wealth  in  terms  of  property  rather  than 
as  abroad,  in  terms  of  income,  we  have  been  plunged  into  the  vortex  of 
the  assessment  of  franchises,  and  have  thus  been  compelled  to  attack 
a  problem  which  does  not  even  exist  in  other  parts  of  the  world. 

Sixth,  the  undue  burden  cast  upon  the  farmer.  Practically, 
this  is  the  problem  of  taxation  in  many  of  our  rural  districts  and  in 
all  agricultural  communities  where  the  failure  of  an  adequate  revenue 
system  and  of  the  readjustment  of  social  resources  makes  it  impos- 
sible to  secure  good  schools  or  fairly  decent  roads  without  over- 
burdening what  is,  after  all,  the  chief  source  of  American  prosperity. 

Seventh,  the  interference  with  business,  due  to  the  partial  and 
spasmodic  enforcement  of  antiquated  laws.  Witness  the  attempt 
in  some  states  suddenly  to  levy  the  mortgage  tax,  as  recently  in  New 
York,  where  the  entire  building  industry  was  thrown  into  confusion; 
or  the  attempt  in  other  states  to  enforce  now  this  and  now  that  kind 
of  property  tax  on  businesses  which  led  to  a  change  in  the  location 
of  the  business  rather  than  to  any  increase  of  revenue.  The  harassing 
of  the  individual  business  or  the  fear  of  harassment  is  becoming  less 
and  less  defensible  in  the  delicately  adjusted  mechanism  of  modern 
business  society.  Over  a  century  ago  Alexander  Hamilton,  in  his 
famous  report  on  manufactures,  stated  this  golden  maxim:  "All 
taxes  which  proceed  according  to  the  amount  of  capital  supposed 
to  be  employed  in  a  business  are  inevitably  hurtful  to  industry  and 
are  particularly  inimical  to  the  success  of  manufacturing  industry 
and  ought  carefully  to  be  avoided  by  a  government  which  desires 
to  promote  it.  It  is  in  vain  that  the  evil  may  be  endeavored  to  be 
mitigated  by  leaving  it,  in  the  first  instance,  in  the  option  of  the  party 
to  be  taxed  to  declare  the  amount  of  his  capital  or  profits." 

Eighth,  the  failure  to  make  great  wealth  contribute  its  due 
share.    In  former  times,  where  property  was  fairly  equally  di» 


PUBLIC  FINANCE  AND  TAXATION  855 

tributed  and  conditions  simple,  inequalities  in  tax  burdens  were 
slight  and  unperceived.  Before  the  huge  aggregations  of  modem 
wealth,  the  crude  tax  machinery  of  earlier  days  stands  impotent. 
And  yet  we  hug  ourselves  with  the  delusion  that  all  that  is  necessary 
is  to  patch  up  the  old  machinery,  whereas  what  is  really  needed  is 
to  throw  the  old  machinery  on  the  scrap  heap  and  to  utilize  entirely 
new  and  modern  instruments  and  processes. 


248.    A  SYSTEM  OF  STATE  AND  LOCAL  TAXES  AND  THEIR 

APPORTIONMENT^ 

In  few  states,  if  in  any,  are  the  different  grades  of  government 
so  intimately  related  to  one  another  as  in  Minnesota.  Whatever 
may  be  thought  about  it  as  a  matter  of  administration,  this  inter- 
relation greatly  complicates  the  problem  of  securing  a  consolidated 
statement  showing  the  cost  of  all  grades  of  government  in  Minnesota. 

The  financial  relations  between  the  state  and  other  governmental 
units  are  especially  complex,  as  will  appear  from  the  following  tabular 
statement: 

I.  The  state  collects  directly: 

(i)  Gross  earnings  taxes  on  railroads,  express,  freight,  and  tele- 
phone companies. 

(2)  Gross  earnings  taxes  on  intenirban  electric  roads. 

(3)  Ad  valorem  taxes  on  telegraph  and  sleeping  car  companies. 

(4)  Two  per  cent  of  gross  insurance  premiums. 

(5)  Three  cents  per  net  registered  ton  of  vessels  navigating  inter- 
national waters. 

(6)  Mortgage  registry  taxes  on  property  not  subject  to  ad 
valorem  taxation. 

(7)  A  great  variety  of  licenses'  and  fees. 

(8)  Payments  for  trespass  on  state  lands. 

(9)  Purchase  price  of  stumpage  sold. 

(10)  Exploration  fees  and  royalties  on  mineral  leases. 

(11)  Inheritance  taxes  on  property  in  Minnesota  transferred  by 
non-residents. 

'  From  the  Third  Biennial  Report  of  the  Minnesota  Tax  Commission  (191  a), 
pp.  248-51,  579-81. 

*  Including  fishing  licenses  and  non-resident  hunting  licenses. 


856  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

2.  The  state  receives  from  the  United  States: 
(i)  Grants  for  state  university. 

(2)  Grants  for  soldiers'  home. 

(3)  Five  per  cent  of  cash  land  sales  in  Minnesota. 

3.  The  state  receives  from  the  counties: 

(i)  Inheritance  taxes,  except  from  non-residents. 

(2)  All  other  state  taxes,  except  as  shown  under  paragraph  i . 

(3)  Court  forfeits. 

(4)  Principal  and  interest  for  state  lands. 

(5)  Ninety  per  cent  of  hay  and  pasturage  rentals. 

(6)  Ninety  per  cent  of  resident  hunting  licenses. 

(7)  Principal  and  interest  for  state  loans,  unless  paid  directly 
by  district  or  municipality. 

4.  The  state  receives  from  all  municipal  corporations: 
(i)  Two  per  cent  of  liquor  licenses.* 

5.  The  state  pays  to  counties: 
(i)  Half  of  the  vessel  taxes. 

(2)  The  state  apportionment  and  special  aids  for  schools. 

(3)  Five  cents  per  acre  of  state  lands  for  school  maintenance. 

(4)  Certain  grants  for  roads  and  bridges. 

(s)  Bounties  relating  to  wolves,  horse  thieves,  and  timber  plant- 
ing. 

(6)  A  proportionate  share  of  gross  earnings  taxes  from  inter- 
urban  electric  roads  for  distribution  to  other  civil  units. 

(7)  Ten  per  cent  of  inheritance  taxes  collected  by  same  counties. 

6.  The  state  pays  directly  to  cities  and  villages: 

(i)  The  two  per  cent  tax  on  gross  insurance  premiums  unless 
there  is  a  duly  organized  firemen's  relief  association. 

(2)  Two  hundred  and  fifty  dollars  per  company  toward  armory 
maintenance. 

7.  The  state  pays  directly  to  firemen's  relief  associations  (where 
properly  organized) : 

(i)  The  two  per  cent  tax  on  gross  insurance  premiums. 

8.  The  state  pays  directly  to  each  company  or  battery  furnishing 
site: 

(i)  Ten  thousand  dollars  for  armory  construction. 

'  Lavs  1907  c.  233,  Sec.  19. 


PUBLIC  FINANCE  AND  TAXATION  857 

In  addition  to  acting  as  collecting  agent  for  the  state,  as  indi- 
cated under  paragraph  3  above,  the  county  has  most  intimate  finan- 
cial relations  with  all  local  governmental  units,  as  may  be  seen  from 
the  following  summary: 

9.  The  county  receives  from  municipalities,  except  from  cities  of 
10,000  or  more  population,  10  per  cent  of  liquor  licenses. 

10.  The  county  pays  to  townships: 
(i)  All  taxes  levied  for  their  use. 

(2)  One-half  of  liquor  licenses  collected  within  such  townships 
(all  of  such  licenses  in  counties  over  275,000  population). 

(3)  Occasional  grants  for  roads,  bridges,  etc. 

11.  The  county  pays  to  school  districts: 

(i)  State  apportionment  and  aids  for  schools. 

(2)  County  apportionment  for  schools. 

(3)  Local  one  mill  and  special  school  taxes. 

12.  The  county  pays  to  cities  and  villages: 
(i)  All  taxes  levied  for  their  use. 

(2)  Many  special  assessments. 

(3)  Occasional  grants  for  roads  and  bridges,  etc. 

13.  The  local  board  of  underwriters  in  each  municipality  also  re- 
ceives directly  from  foreign  insurance  companies  2  per  cent  of 
the  gross  premiums  for  maintenance  of  salvage  corps. 


The  levying  and  collection  of  the  property  taxes  serve  to  illustrate 
the  complexity  of  the  situation.  The  law  provides,  that  all  taxes 
shall  be  levied  or  voted  in  specific  amounts,  and  the  rate  per  cent  shall 
be  determined  from  the  amount  of  property  as  equalized  by  the  tax 
commission  each  year,  except  such  general  taxes  as  may  be  definitely 
fixed  by  law. 

Five  different  oflScial  bodies  have  to  do  with  fixing  the  amount 
of  the  tax  levy  each  year — the  state,  the  county,  the  town,  village 
or  city,  and  the  school  district. 

The  state  rate  for  general  revenue  purposes  is  determined  by  the 
legislature  and  may  vary  from  year  to  year  according  to  the  needs  of 
the  state,  the  levy  for  such  purpose  this  year  being  i .  9  mills.  The 
total  state  levy  this  year  for  all  purposes,  including  the  one  mill 
school  tax,  is  3 .  88  mills. 


858  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

County  taxes,  except  as  otherwise  provided  in  case  of  counties 
having  more  than  150,000  population,  are  levied  by  the  county  board 
at  its  meeting  in  July  of  each  year,  and  are  based  upon  an  itemized 
statement  of  the  estimated  expenses  for  the  ensuing  year,  which  state- 
ment must  be  included  in  the  published  proceedings  of  the  board. 

City  and  village  taxes  are  determined  by  the  local  authorities 
in  accordance  with  the  methods  prescribed  in  their  charters. 

The  amount  of  taxes  to  be  raised  for  town  purposes  is  deter- 
mined by  the  voters  at  the  annual  town  meeting. 

School  taxes,  except  in  districts  organized  under  special  laws, 
are  determined  by  the  voters  at  the  annual  meeting. 

The  amounts  of  the  different  taxes  so  determined  must  be  certi- 
fied to  the  county  auditor  on  or  before  October  10  of  each  year.  The 
coimty  auditor  then  computes  the  rate  necessary  to  produce  the 
required  revenue  and  makes  the  levy  accordingly. 

There  are,  however,  certain  limitations  on  the  amount  of  taxes 
that  may  be  levied  for  different  purposes  in  any  one  year. 

Except  where  county  commissioners,  township  supervisors,  or 
corporate  authorities  of  any  city,  town,  village,  or  school  district 
are  authorized  by  special  law  to  levy  any  tax,  the  amounts  that  may 
be  levied  are  limited  as  follows: 

Counties  whose  taxable  valuation  is  $1,000,000  or  more,  may  not 
levy  taxes  in  excess  of  5  mills  for  general  revenue  purposes,  and 
counties  having  a  less  valuation  not  in  excess  of  $5,000,  or  exceeding 
a  rate  of  i  per  cent. 

Town  taxes  for  revenue  purposes  shall  not  exceed  2  mills  where 
the  valuation  is  $100,000  or  more,  nor  more  than  $150  where  the 
valuation  is  less  than  $100,000,  and  then  not  to  exceed  one-half  of  i 
per  cent.  But  towns  may  levy  taxes  for  roads  and  bridges  not  to 
exceed  10  mills  on  the  dollar,  and  for  support  of  poor  not  in  excess  of 
5  mills  on  the  dollar. 

School  districts,  in  addition  to  the  general  i  mill  tax,  may  levy 
a  tax  not  in  excess  of  15  mills  for  support  of  schools  and  i  per  cent 
for  erection  of  school  houses. 

THE  COLLECTION  OP  PROPERTY  TAXES 

The  coimty  auditor  computes  the  rate  of  levy  necessary  to  pro- 
duce the  aggregate  amount  of  money  required  by  the  four  separate 
taxing  authorities,  and  extends  the  tax  against  each  description  of 
land  and  each  individual  assessed  for  personal  property. 


PUBLIC  FINANCE  AND  TAXATION  859 

The  auditor  makes  a  separate  tax  list  for  each  taxing  district 
of  the  county  showing  ownership  and  description  of  property,  with 
columns  for  the  valuation  and  for  the  various  items  of  taxation 
included  in  the  total. 

The  tax  Hsts  are  turned  over  to  the  county  treasurer  by  the 
auditor  on  or  before  the  first  Monday  in  January  of  each  year,  and 
the  treasurer  proceeds  to  receive  and  collect  the  taxes  therein  levied. 

On  receiving  the  tax  lists  from  the  auditor  the  treasurer,  if 
directed  by  the  county  board,  is  required  to  give  three  weeks*  pub- 
lished notice  in  a  newspaper,  specifying  the  rate  of  taxation  for  all 
purposes,  and  the  amounts  raised  for  each  specific  purpose.  He  may 
also  be  directed  by  the  county  board  to  visit  different  places  in  the 
coimty  for  the  purpose  of  receiving  taxes. 

Personal  property  taxes  become  due  and  payable  on  and  after 
the  delivery  of  the  tax  lists  to  the  treasurer,  and  if  not  paid  before 
March  i,  they  become  delinquent  and  a  penalty  of  10  per  cent  is 
added. 

Taxes  on  real  estate  also  become  due  and  payable  on  delivery  of 
the  tax  lists  to  the  county  treasurer,  and  if  not  paid  before  June  i,  a 
penalty  of  10  per  cent  is  added;  and  if  such  taxes  remain  unpaid 
until  January  i,  following,  an  additional  penalty  of  5  per  cent  is  added. 

The  law;  however,  permits  the  payment  of  real  estate  taxes  in 
two  installments — one-half  prior  to  Jime  i,  and  the  remaining  one- 
half  any  time  prior  to  November  i  provided  that  the  taxes  charged 
against  any  tract  or  lot  of  land  exceed  one  dollar. 

Upon  pajonent  of  any  tax,  the  treasurer  is  required  to  issue  his 
receipt  therefor,  showing  the  name  of  the  person,  the  amount  and 
date  of  payment,  and  the  land,  lot,  or  other  property  on  which  the 
tax  was  levied,  and  the  year  or  years  for  which  such  levy  was  made. 

Personal  property  taxes  are  assessed  against  the  person  and  not 
against  the  property,  while  real  estate  taxes  are  assessed  against 
the  property  and  not  against  the  person.  K  personal  property  taxes 
become  delinquent  collection  is  enforced  against  the  person  assessed 
by  distress  and  sale  of  any  personal  property  he  may  own,  while  the 
collection  of  delinquent  real  estate  taxes  is  enforced  by  the  sale  of  the 
property  assessed.  ^^ 


86o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

249-    THE  GENERAL  PROPERTY  TAX' 

Most  of  our  states  have  at  various  times  made  spasmodic  efforts 
to  enforce  the  general  property  tax.  In  no  other  state  has  there 
been  a  more  continuous  and  comprehensive  effort  to  secure  the 
return  for  taxation  of  all  personal  property  than  in  Ohio. 

The  constitution  of  Ohio  adopted  in  1851  required  the  taxation 
of  all  real  and  personal  property  by  a  uniform  rule,  at  its  true  value 
in  money.  The  system  devised  for  the  enforcement  of  this  provision 
was  thus  described  by  the  Special  Tax  Commission  appointed  in  1893: 

"We  have  in  Ohio  the  most  efficient  and  minute  scheme  of  bringing 
upon  the  duplicate  [i.e.,  assessment  roll]  all  of  these  classes  of  property, 
which  has  been  devised  in  any  state.  Every  citizen  is  bound  under  oath 
to  make  a  complete  return  of  his  property.  The  list  which  he  returns  is 
to  embrace  all  forms  of  personal  property;  if  he  declines  to  make  the  oath 
required  by  law,  a  penalty  of  50  per  cent  is  added.  The  statutes  also 
provide  a  method  by  which  the  auditor  may  bring  before  him  the  citizen 
and  examine  him,  if  he  suspect  that  the  return  is  not  a  complete  one.  In 
addition  to  all  this,  the  county  commissioners  have  authority  to  make  a 
contract  with  such  persons  as  may  give  information  which  will  result  in 
personal  property  being  placed  upon  the  duplicate.  These  persons  are 
rewarded  with  a  large  proportion  of  the  amount  recovered  through  their 
efforts.  (In  the  counties  containing  the  cities  of  Cincinnati  and  Cleveland, 
25  per  cent;  in  other  counties,  20  per  cent)." 

Bearing  in  mind  these  extremely  stringent  provisions  of  the  law, 
it  remains  to  determine  how  far  they  have  proved  effective.  It  is 
needless  to  quote  in  detail  from  the  pages  of  figures  presented  by  the 
Commission  to  show  the  utter  failure  of  these  measures  to  reach  the 
personal  property  of  the  state.     A  few  citations  should  suflSce: 

"In  1866  the  valuation  of  the  city  of  Cincinnati  was:  realty,  $66,454,- 
602;  personalty,  $67,218,101;  the  personal  property  was  greater  than  the 
amount  of  real  estate  by  $800,000." 

"In  1892,  twenty-five  years  later,  the  real  estate  of  Cincinnati  had 
increased  to  $144,208,810,  while  the  personal  property  had  decreased  to 
$44,735,670." 

"The  amount  of  money  returned  for  taxation  in  the  state  in  1866  was 
nearly  $3,000,000  more  than  it  is  to-day  (1893)." 

'  Adapted  from  the  report  of  a  committee  of  the  International  Tax  Associa- 
tion on  "The  Causes  of  the  Failure  of  the  General  Property  Tax,"  in  Slate  and 
Local  Taxation,  Addresses  and  Proceedings  of  the  Fourth  International  Conference 
(1910),  pp.  301-4.     International  Tax  Association,  1911. 


PUBLIC  FINANCE  AND  TAXATION  86l 

"In  1866  the  amount  of  money  returned  for  taxation  in  Hamilton 
county  (containing  Cincinnati)  was  nearly  five  times  what  it  was  in  1892; 
the  amount  of  credits  was  nearly  double  what  it  is  today.  The  amount 
of  bonds  and  stocks  was  $200,000  more  than  it  was  in  1892." 

These  were  the  fiscal  results.  The  social  results  are  thus  sum- 
marized by  the  Commission: 

"The  system  as  it  is  actually  administered  results  in  debauching  the 
moral  sense.  It  is  a  school  of  perjury.  It  sends  large  amounts  of  property 
into  hiding.  It  drives  capital  in  large  quantities  from  the  state.  Worst 
of  all,  it  imposes  unjust  burdens  upon  various  classes  in  the  community.  .  .  . 
This  inequality  of  taxes  weighs  most  heavily  upon  those  whose  thrift  and 
prudence  have  resulted  in  affording  to  themselves  or  their  children  a  com- 
petence. It  is  evidence  that  this  burden  rests  with  peculiar  force  upon 
those  persons  whose  scrupulous  honesty  induces  them  to  make  full  and 
complete  returns  of  all  their  property." 

Notwithstanding  this  severe  condemnation  of  the  system  and 
the  exhibition  of  its  failure,  practically  no  legislative  relief  was 
secured.  The  same  conditions  continued.  In  1906  another  Com- 
mission was  appointed.  About  that  time  the  Supreme  Court  declared 
the  "tax  inquisitor"  law  unconstitutional,  but  this  had  no  effect 
on  the  administration  of  the  law  in  the  period  covered  by  the  investi- 
gation. 

The  report  of  this  Commission,  submitted  in  1908,  shows  the 
same  failure  in  administration  as  the  report  of  the  Commission  of 
1893.    The  fiscal  results  can  be  dismissed  briefly: 

"The  value  of  all  credits  returned  was  $34,000,000  less  in  1906  than 
it  was  in  1890,  and  $16,000,000  less  than  it  was  in  1870.  The  value  of  all 
stocks  and  bonds  was  $2,575,000  less  in  1906  than  it  was  in  1880,  and  the 
value  of  all  intangible  property,  including  moneys,  credits,  stocks  and  bonds, 
as  returned  for  taxation,  was  nearly  $8,000,000  less  in  1906  than  it  was  in 
1890." 

Similar  examples  are  given  in  regard  to  other  classes  of  personal 
property.  To  quote  the  totals,  or  the  ratio  of  personal  property 
to  real,  would  be  misleading,  because  under  the  Ohio  law  all  of  the 
property  of  railroads,  and  of  some  other  corporations,  including 
their  real  estate,  is  returned  as  personal  property.  For  this  reason 
the  assertion  sometimes  made  that  the  listing  system  of  Ohio  must 
be  successful  because  the  reports  show  that  personal  property  amounts 
to  some  30  per  cent  of  the  total  assessment,  is  based  upon  a  mis- 
understanding. 


862  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

This  Ohio  report  of  1908  continues: 

"The  widespread  concealment  of  intangible  property,  increasing  in 
amount  year  by  year,  is  the  most  convincing  proof  of  the  failure  of  the 
general  property  tax.  It  shows  that  after  more  than  fifty  years  of  expe- 
rience, with  all  conceivable  methods  in  the  way  of  inquisitor  laws,  severe 
penalties,  and  criminal  statutes,  designed  to  force  the  owners  of  moneys 
and  credits,  stocks  and  bonds,  to  put  their  holdings  upon  the  tax  duplicate, 
not  only  is  the  percentage  of  such  property  less  than  ever  before,  but 
public  sentiment  seems  to  be  more  and  more  openly  approving  an  evasion 
of  the  law.  Such  a  condition  of  afifairs  is  so  manifestly  wrong  and  so 
inimical  to  good  government  that  its  longer  continuance  is  a  grave  injury 
to  the  state." 

It  is  significant  that  this  Commission,  whose  members  had  first- 
hand knowledge  of  the  conditions  resulting  from  stringent  attempts 
to  enforce  the  general  property  tax,  do  not  advise  a  stricter  adminis- 
tration, or  even  a  continuance  of  the  existing  system.  Instead,  they 
make  the  following  recommendations: 

"No  just  or  satisfactory  system  can  be  established  in  this  state  with- 
out removing  the  constitutional  obstacles  that  now  bar  the  way.    The 

general  property  tax  has  long  ago  served  its  day The  reports  of 

State  Tax  Commissions  within  the  last  ten  years  disclose  no  instance  in 
which  the  general  property  tax  has  been  approved  and  few  in  which  it  has 

not  been  expressly  condemned We  recommend  an  amendment  to 

the  constitution  of  Ohio  abolishing  the  general  property  tax  now  required, 
and  giving  the  legislature  a  freer  hand  to  deal  with  such  subjects  as  fran- 
chises, stocks,  bonds,  cash,  mortgages,  and  other  intangible  property." 

Your  Committee  has  quoted  at  this  length  from  the  Ohio  reports 
because  that  state  is  recognized  to  have  made  as  earnest  and  thorough 
efforts  to  enforce  the  tax  by  severe  administration  as  any  of  the 
states.  The  statistics  from  other  states  that  have  listing  systems 
show  practically  the  same  results. 

250.    THE  TAXATION  OF  INTANGIBLE  PERSONALTY 

I.      THE   MINNESOTA  PLAN' 

It  is  generally  conceded  that  the  value  of  money  and  credits 
owned  in  the  state  far  exceeds  the  value  of  tangible  personal  property, 
yet  prior  to  191 1  the  assessed  value  of  such  property  never  in  any  year 

•  Adapted  from  the  Third  Biennial  Report  of  the  Minnesota  Tax  Commission 
(1912),  pp.  46-57. 


PUBLIC  FINANCE  AND  TAXATION  863 

exceeded  29  per  cent  of  the  total  personal  property  assessment  of  the 
state. 

In  1880  money  and  credits  represented  22.6  per  cent  of  our 
total  personal  property  assessment.  In  1890  it  had  increased  to 
27.8  per  cent  of  the  total,  but  in  the  next  ten  years,  notwithstanding 
the  rapid  growth  of  the  state  in  wealth  and  population,  the  trend  was 
downward,  until,  in  1900,  it  represented  but  22.5  per  cent  of  the  total. 
During  the  next  decade  it  began  to  show  some  increase,  noticeably 
so  after  the  organization  of  the  tax  commission  in  1907,  and  in  1910 
it  reached  the  highwater  mark  imder  the  old  system,  the  amount 
that  year  being  29  per  cent  of  the  total.  Realizing  our  failure  tmder 
the  old  system,  after  more  than  half  a  century  of  unsuccessful  efifort 
to  get  certain  forms  of  intangible  personal  property  on  the  tax  rolls, 
the  legislature  in  191 1  enacted  a  law  providing  for  the  separate  listing 
of  money  and  certain  classes  of  credits,  and  imposing  a  flat  tax  rate 
of  three  mills  on  the  dollar  in  lieu  of  all  other  taxes.  In  191 1,  the 
first  year  of  the  three  mill  tax  rate,  the  assessed  value  of  money  and 
credits  jumped  to  48 . 5  per  cent  of  the  total,  while  this  year  it  is 
50.8  per  cent  of  the  total  personal  property  assessment  of  the 
state. 

In  1 910  the  assessed  value  of  money  and  credits  in  the  classes 
now  included  in  the  three  mill  tax  law  amounted  to  $13,919,806. 
In  191 1,  the  first  year  under  the  new  law,  the  amount  returned  for 
taxation  was  $115,481,807,  an  increase  of  730  per  cent  over  the  pre- 
ceding year.  The  total  assessment  of  money  and  credits  this  year 
amounts  to  $135,369,314,  being  an  increase  of  $19,887,507,  or  17.2 
per  cent  over  191 1,  and  873  per  cent  over  1910.  Based  on  the  popu- 
lation of  1910,  the  per  capita  assessment  of  this  class  of  property 
was  $6.70  in  1910,  $55.63  in  1911,  and  $65.22  in  1912.  Compared 
with  bank  deposits,  the  assessment  of  1910  represented  only  4.2 
per  cent  of  such  deposits,  while  in  191 1,  it  equaled  33 .8  per  cent,  and 
in  1912,  42.4  per  cent  of  bank  deposits. 

That  the  assessment  is  much  more  widely,  and  hence  much  more 
equitably  distributed  among  the  people  is  shown  by  the  large  increase 
in  the  number  of  people  assessed  under  the  new  law.  While  no 
exact  data  is  available  for  1910,  it  is  estimated  that  the  number  of 
people  assessed  for  this  class  of  property  in  that  year  did  not  exceed 
6,200.  In  191 1  the  number  assessed  was  41,439,  and  in  1912,  the 
present  year,  50,564  assessments  of  such  property  have  been  reported, 
a  gain  of  9,125,  or  22  per  cent  over  the  preceding  year. 


864  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

While  it  is  not  claimed  that  all  intangible  property  subject  to 
taxation  under  the  new  law  has  been  placed  on  the  assessment  rolls, 
the  proportion  that  now  escapes  taxation  is  much  less  than  it  was 
when  we  attempted  to  tax  such  property  with  the  same  machinery 
and  on  the  same  basis  as  other  forms  of  property.  In  addition,  it 
will  not  be  denied  that  the  tax  burden  on  this  class  of  property  is 
much  more  widely,  as  well  as  much  more  equitably  and  justly, 
distributed  than  it  was  under  the  old  system. 

While  it  can  scarcely  be  claimed  that  two  years  afford  sufficient 
time  to  demonstrate  the  success  or  failure  of  any  radical  departure 
from  methods  of  taxation  that  have  grown  hoary  with  age,  yet 
our  brief  experience  in  Minnesota  with  the  three  mill  tax  on  money 
and  credits  justifies  us  in  the  belief  that  we  have  taken  a  decided 
step  in  advance.  Men  differ  as  to  the  wisdom  of  taxing  property 
of  this  nature  at  all,  but  there  is  no  difference  in  opinion  that  a  burden- 
some or  confiscatory  tax  drives  such  property  into  concealment. 
Experience  in  our  own  and  every  other  state  has  demonstrated  that 
when  a  tax  rate  consumes  more  than  lo  per  cent  of  the  income  from 
this  class  of  property  it  will  not  be  voluntarily  listed  for  taxation.  The 
average  tax  rate  in  Minnesota  this  year  is  nearly  30  mills.  With 
such  a  rate  consuming,  as  it  would,  from  40  to  60  per  cent  of  the  income 
from  invested  credits,  it  would  be  folly  to  hope  to  reach  more  than 
a  fraction  of  such  property  for  purposes  of  taxation  under  the  old 
system. 

It  was  for  this  reason  that  the  legislature  passed  the  three  mill 
tax  law.  We  believe  it  is  a  decided  improvement  over  the  old  method 
of  taxing  money  and  credits,  because  it  is  more  equitable  and  will 
eventually  produce  more  revenue  than  the  old  system  did.  Above 
all,  it  makes  for  good  citizenship,  because  it  reduces  the  premium 
on  dishonesty,  and  permits  men  to  be  truthful  in  their  tax  statements, 
without  the  fear  of  having  their  property  confiscated  in  excessive 
tax  rates. 

II.      THE  RESULTS   IN   PENNSYLVANIA,   CONNECTICUT,   AND   MARYLAND' 

The  effect  of  reducing  the  rate  on  intangible  personalty  and 
providing  improved  administrative  machinery  in  Pennsylvania  is 
shown  in  an  increase  in  assessments  from  $155,107,000  in  1S85  to 
$390,750,000  in  18S6,  or  152  per  cent;    at  the  same  time  revenue 

'  Adapted  from  the  Report  of  the  United  States  Commissioner  of  Corporations  on 
Taxation  of  Cor poralions,  Part  IV  (191 2),  pp.  14-15- 


PUBLIC  FINANCE  AND  TAXATION  865 

increased  from  $610,608  to  $1,172,250,  or  92  per  cent.  The  average 
increase  for  the  five  years  following  (1887-1891)  was  57  per  cent  in 
both  assessments  and  receipts.  In  1892  the  rate  was  changed  from 
$3  to  $4.  During  the  five  years  following  (1892-1896)  the  average 
assessment  increased  to  $839,565,000,  or  37  per  cent,  and  revenue 
increased  to  $3,358,260,  or  82  per  cent.  In  1910  assessments 
amounted  to  $1,741,865,000  and  revenue  to  $6,967,460,  an  increase 
in  each  case  of  107  per  cent  over  the  yearly  average  for  the  1892-1&96 
period. 

The  Connecticut  plan  gives  the  option  of  paying  locally  the  gen- 
eral-property tax  at  the  regular  rates.  Amounts  assessed  and  paid 
locally  are  shown  separately  from  those  assessed  and  paid  to  the  state 
at  the  uniform  rate.  The  percentage  of  increase  is,  however,  based  on 
the  total  of  both.  The  low  uniform  rate  was  adopted  by  the  state  of 
Connecticut  in  1890.  For  the  following  seven-year  period  (1890- 
1897)  the  average  yearly  assessments  increased  over  the  assessments 
for  1889  from  $12,982,000  to  $27,836,000,  or  114  per  cent,  while 
revenue  decreased  from  $162,288  to  $133,107,  or  18  per  cent.  During 
1898  the  imiform  rate  was  raised  to  $4.  This  resulted  in  decreasing 
assessments  14  per  cent  and  decreasing  revenue  2  per  cent.  This 
decrease,  however,  was  overcome,  and  in  1910  assessments  amounted 
to  more  than  $45,000,000,  an  increase  over  1898  of  89  per  cent,  and 
revenue  to  approximately  $230,000,  or  an  increase  of  76  per  cent  during 
this  period. 

Figmres  for  the  entire  state  of  Maryland  are  not  available,  and 
those  [which  are  here  given]  are  for  the  city  of  Baltimore  only.  The 
effect  of  the  inauguration  of  the  low  rate  in  1S97  was  to  increase 
assessments  from  $6,000,000  to  $58,704,000,  or  878  per  cent,  and 
revenue  from  $130,650  to  $280,312,  or  115  per  cent  over  the  previous 
year.  Between  1897  and  191 1  assessments  increased  to  $165,834,000, 
or  182  per  cent,  and  revenue  increased  to  $862,337,  or  208  per  cent. 

251.    TAXATION  OF  CORPORATIONS* 

I.      SOME  OF  THE  ISSUES  IN  THE  TAXATION  OF  CORPORATIONS 

(i)  Should  taxation  be  intentionally  so  framed  as  to  lay  especial 
burdens  upon  corporations  ?    On  the  one  hand,  it  can  be  contended 

'  Adapted  from  the  Report  of  the  Commissioner  of  Corporations  on  Taxation  of 
Corporations,  Part  II  (1910),  pp.  9-10,  2.  In  Part  IV  of  the  report  the  foUowing 
classes  of  taxes  are  mentioned: 


866  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

that  corporations  are  merely  artificial  creatures  of  the  states  and 
that  they  should  pay  well  for  the  exceptional  privileges  enjoyed 
by  them;  on  the  other  hand,  it  can  be  contended  that  corporations 
are  essential  to  business  as  at  present  conducted,  and  that,  by  reason 
of  the  comparative  ease  with  which  their  investments  and  operations 
can  be  ascertained,  they  actually  bear  a  heavier  burden  of  taxation 
even  when  no  theoretical  discrimination  is  made  against  them. 

(2)  Should  shareholders  and  bondholders  pay  taxes  in  addi- 
tion to  the  taxes  paid  by  the  corporation  on  the  corporate  property  ? 
On  the  one  hand,  it  can  be  contended  that  the  corporation  is  an 
artificial  entity  distinct  from  the  persons  interested  in  it;  on  the 
other  hand,  it  can  be  contended  that  the  corporation  and  the  persons 
interested  in  it  are  identical  in  fact,  and  that  to  tax  the  corporation 
and  those  persons  simultaneously  is  to  burden  the  same  persons 
twice. 

(3)  Is  it  inequitable  to  tax  either  a  corporation  or  its  stock- 
holders on  the  basis  of  the  market  value  of  the  stock  ?  On  the  one 
hand,  it  can  be  contended  that  thus  the  tax  is  based  both  upon 
property  and  upon  expectation,  and  that  in  the  case  of  natural 
persons  expectation  is  never  taxed;  on  the  other  hand,  it  can  be 
contended  that  corporate  organization  faciUtates  the  capitaliza- 
tion and  present  realization,  in  a  sense,  of  merely  expected  profits, 
and  that  in  recognition  of  the  advantage  thus  conferred  by  the 
state  it  is  only  fair  to  exact  a  special  burden. 

(4)  Should  a  state  permit  outside  corporations  to  do  business 
within  its  borders  upon  terms  more  favorable  than  those  exacted 
from  the  corporations  of  the  state  itself?    On  the  one  hand,   it 


1.  General  property  tax 
(a)  on  all  property 

(6)  on  property  used  in  the  business 
(c)  on  property  not  used  in  the  business 
{d)  on  property  and  also  on  franchise  value 

2.  Special  franchise  tax  (franchise  valued  as  property) 

3.  Capital  stock  tax 

4.  Gross  earnings  and  gross  receipts  taxes 

5.  Mileage  tax 

6.  Corporate-excess  tax 

7.  Tax  on  corporate  loans 

8.  Lump  sum  tax 

9.  State  business-license  tax 
10.  Income  tui 


PUBLIC  FINANCE  AND  TAXATION  867 

can  be  contended  that  comity  requires  the  free  admission  of  cor- 
porations from  other  states;  on  the  other  hand,  it  can  be  contended 
that  a  corporation  is  in  legal  theory  existent  only  within  the  boundaries 
of  the  sovereignty  creating  it,  and  that  at  any  rate  it  is  inexpedient 
and  unfair  to  admit  corporations  upon  any  other  basis  than  the 
bearing  of  at  least  as  heavy  burdens  as  are  imposed  upon  those 
chartered  by  the  State  itself. 

(5)  Should  the  states  differ  from  one  another  in  their  systems 
of  corporate  taxation?  On  the  one  hand,  it  can  be  contended  that 
the  circumstances  of  the  several  states  vary;  on  the  other  hand, 
it  can  be  contended  that  the  experiments  now  made  in  the  several 
states  may  be  expected  to  show  which  system  of  corporate  taxa- 
tion is  the  best,  and  that  at  any  rate  uniformity  is  desirable  in  order 
to  prevent  capital  from  being  excessively  concentrated  in  a  few  states. 

n.      SOME   RESULTS   OF   THE   TAXATION   OF   CORPORATIONS 

The  general  results  of  the  study  of  corporate  taxation  in  New 
England  and  the  Middle  Atlantic  states  are  these: 

(i)  Each  state  has  a  system  of  its  own,  and  as  yet  there  is  no 
marked  tendency  toward  uniformity. 

(2)  No  state  at  present  treats  all  corporations  in  exactly  the 
same  way,  and  as  between  the  several  sorts  of  corporations  the 
tendency  still  seems  to  be  toward  further  differentiation. 

(3)  In  most  of  the  states  changes  are  so  frequent  as  to  indicate 
that  as  yet  a  satisfactory  and  ultimate  method  has  not  been  dis- 
covered. 

(4)  The  income  from  corporate  taxation  is  almost  invariably 
increasing,  partly  because  of  increase  in  the  number  and  size  of 
corporations  and  partly  because  of  changes  in  methods  of  taxation. 

(s)  There  is  a  tendency  toward  separating  sources  of  local  revenue 
from  sources  of  state  revenue,  and  the  taxation  of  corporations  tends 
to  become  a  source  of  state  revenue  only,  with  the  exception  that 
corporation  lands,  other  than  rights  of  way,  are  still  usually  taxed 
like  the  lands  of  individuals. 

(6)  The  taxation  of  corporations  is  chiefly  administered  by  state 
ofl&cials. 


868 


MATERIALS  FOR  ELEMENTARY  ECONOMICS 


Percentage  op  State  Taxes  (as  Distinguished  from  Local  Taxes) 
Contributed  bv  Certain  Sources  of  Taxation  for  1910' 


States 


new  englakd  group 

Maine 

New  Hampshire 

Vermont 

Massachusetts 

Rhode  Island 

Connecticut 

MIDDLE  ATLANTIC  GROUP 

New  York 

New  Jersey 

Pennsylvania 

Delaware 

Maryland 

District  of  Columbia 

EASTERN  CENTRAL  GROUP 

Ohio 

Indiana 

Illinois 

Michigan 

Wisconsin 

WESTERN  CENTRAL  GROUP 

Minnesota 

North  Dakota 

South  Dakota 

Iowa 

Nebraska 

Kansas 

Missouri 


Corporation 

lax 


54 
39 
83 

41 
46 

71 

29 
91 
71 
67 

33 

i6* 

54* 

19* 

34* 

45 

71 

66 

24* 
18* 
26* 
25* 
31* 

20* 


General 

property 

tax 


34 
47 


41 
41 
9 


34 

74 

25 
81 

58 

52 
22 

27 
76 
81 
62 

74 
69 

43 


Inheri- 
tance 
tax 


6 

9 
8 

12 


23 

8 

7 
I 

8 


6 
2 

5 


Liquor 
tax 


5 
6 
8 


27 
7 


13 

8 

20 


30 


Miscella- 
neous tax 
receipts 


5 
II 

21* 

I 

10 

32 

13 
2 


Total 
State 
taxes 


100 
100 
100 
100 
ICO 
100 

100 
100 
100 
ICO 
100 
100 

100 
100 
100 
100 
100 

100 
100 
100 
100 
100 
100 
100 


*  Includes  state's  share  of  general  property  tax  collected  locally  from  certain  corporations. 
(See  table  of  financial  results  under  each  state.)  With  the  exception  of  the  District  of  Columbia, 
as  previously  noted,  it  is  impossible,  practically,  to  ascertain  or  estimate  from  the  information  avail- 
able the  amount  thus  received  from  corporations  in  the  states  included  in  this  table. 

'  From  the  Report  of  the  Commissioner  of  Corporations  on  Taxation  of  Corpora- 
lions,  Part  IV  (1912),  p.  s. 


PUBLIC  FINANCE  AND  TAXATION 


869 


Percentage  of  State  Taxes  (as  Distinguished  from  Local  Taxes)  Con- 
tributed BY  Certain  Classes  of  Corporations  for  19 10' 


Sutei 

^1 

Is 

.8 

a 

S 
8 

a 

8 

Telegraph 
and  telephone 
companies 

tsO 

a 
1". 

is 

S8 

8.8 

a  a 

c  0 
■-1  0 

cn 

II 

£8 

M 

h 

.2  a 

.1 

Total  taxes 
and  fees  from 
corporations 

NEW  ENGLAND  GKOtJP 

Maine 

3f 
78 

27 
13 
10 
52 

22 
SS 
41 

34 
46 
37 

38 

1^ 
82 
78 

83 
S4 
44 
29 
46 
SO 
26 

2 
I 

z 

5 

10 

12 
16 
14 
20 

33 
17 

18 

3 
10 
20 
22 

9 

22 
33 
16 
9 
18 

8 

36 
46 
46 
20 
29 
36 

22 

21 

too 

1 00 

New  Hampshire 

Vermont 

Si 

4J 

52 

18 

I 

13 

"h" 
23 

3 

X 

"e" 
s 

49 
39 

:8 
30 
13 

I 

33 

3 

4 

4 
2 
3 
5 

5 
3 
7 
12 

a 
14 

lOO 

Massachusetts 

100 
100 
100 

1 00 

Rhode  Island 

Connecticut 

MIDDLE  ATLANTIC  GROtJP 

New  York 

I 

New  Jersey   

lOO 

Pennsylvaniaf 

9 

5 
33 

6 

Delaware 

I 

100 

Maryland 

Dbtrict  of  Columbia .... 

EASTERN  CENTRAL  GROUP 

Ohio 

i  " 

X 

100 

Indiana 

Illinois 

100 

Michigan 

X 

z 

2 



100 

Wisconsin 

2 

2 

7 

7 

20 

23 

5 
16 

100 

WESTERN  CENTRAL  GROUP 

Minnesota 

I 

I 

X 

I 

a 

North  Dakota 

South  Dakota 

100 

Iowa 

2 
2 

3 
3 

"i" 

9 

14 

100 

Nebraska 

2 

I 

I 

3 

Missouri 

t  The  Pennsylvania  figures  in  this  table  are  taken  from  State  Auditor's  Report,  igio. 


'  From  the  Report  of  the  Commissioner  of  Corporations  on  Taxation  of  Corpora- 
ions,  Part  IV  (1912),  pp.  7-8. 


870  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

352.    THE  INHERITANCE  TAX* 

To  Americans  of  the  last  generation  the  inheritance  tax  was  a 
fiscal  curiosity.  It  had  been  adopted  by  Pennsylvania  in  1826, 
and  subsequently  had  found  its  way  into  a  few  other  states.  But 
most  of  these  eariy  experiments  came  to  untimely  ends,  and  a  "legacy 
tax"  enacted  by  the  national  government  in  1862  met  with  a  similar 
fate  when  internal  taxation  was  reduced  after  the  Civil  War.  Prior 
to  1885  the  net  results  of  all  efforts  to  domesticate  this  tax  in  the 
United  States  had  been  that  two  states,  Pennsylvania  and  Maryland, 
were  then  levying  light  duties  upon  collateral  inheritances.  In  that 
year,  however,  New  York  established  a  tax  upon  collateral  inherit- 
ances, which,  in  1891,  was  extended  to  direct  inheritances  of  personal 
property;  and  her  example  was  soon  followed  by  other  states.  In 
1894  Pennsylvania  and  Maryland  had  collected  $663,000  from 
inheritance  taxes;  in  1892  six  states  collected  $3,107,000.  Ten 
years  later  twenty-eight  states  drew  $7,138,000  of  revenue  from  this 
source,  and  in  1905  thirty  states  received  approximately  $10,600,000. 
At  the  present  moment  the  inheritance  tax  is  found  in  not  less  than 
thirty-four  states,  and  in  nineteen  of  these  it  applies  to  direct  inherit- 
ance as  well  as  to  collateral.  Manifestly  the  taxation  of  inheritance 
is  no  longer  a  debatable  issue,  but  must  be  acceoted  as  an  accomplished 
fact  of  American  finance. 

In  considering  the  proper  function  of  the  inheritance  tax  we  are 
brought  directly  to  the  question  whether  it  should  be  employed 
solely  for  the  purpose  of  raising  revenue,  or  should  be  used  as  a  means 
of  regulating  the  distribution  of  wealth.  In  the  laws  now  on  the 
statute  books  of  the  several  states  the  controlling  purpose  is,  clearly, 
to  raise  revenue.  Upon  direct  inheritance  the  rates  range  usually 
from  I  to  3  per  cent,  and  in  no  case  exceed  5  per  cent;  while  upon 
collateral  they  seldom  rise  above  6  per  cent.  These  figures  are  not 
higher  than  can  be  justified  on  purely  financial  grounds;  in  fact,  in 
many  states  the  rates  are  less  than  the  experience  of  other  countries 
shows  that  the  legislature  might  well  impose.  They  yield  consider- 
able revenue  which  can  be  collected  with  reasonable  certainty,  slight 
expense  and  comparatively  little  hardship  to  taxpayers.  Upon 
estates  of  the  largest  size  passing  to  distant  heirs  or  strangers  in 

•  Adapted  from  C.  J.  Bullock,  "The  Position  of  the  Inheritance  Teix  in  Ameri- 
can Taxation,"  in  State  and  Local  Taxation,  Addresses  and  Proceedings  of  the  First 
National  Conference  of  the  National  Tax  Association  (1907),  pp.  231-40.  The 
Macmillan  Co.,  1908. 


PUBLIC  FINANCE  AND  TAXATION  871 

blood,  the  tax  sometimes  rises  to  15  or  20  per  cent;  but  occasion 
seldom  offers  for  the  application  of  such  high  rates,  and  even  then 
the  limits  set  by  soimd  principles  of  finance  are  not  overstepped. 
A  tax  of  20  per  cent  upon  property  in  excess  of  $500,000  passing  to 
unknown  relatives  or  strangers  in  blood,  may  appear  startling  at 
first  thought,  yet  it  may  be  defensible  from  the  purely  fiscal  point 
of  view,  and  will  exert  little  influence  upon  the  distribution  of  wealth 
in  the  United  States.  Upon  most  inheritances,  collateral  as  well  as 
direct,  we  are  now  levying  from  i  to  5  per  cent.  On  the  theory  that 
the  purpose  of  the  laws  is  to  raise  revenue  these  rates  can  be  readily 
understood;  they  are  altogether  ridiculous,  if  we  assume  that  the 
purpose  is  to  modify  perceptibly  the  distribution  of  wealth. 

If  swollen  fortunes  are  to  be  reduced  to  reasonable  size  by  inherit- 
ance taxation,  the  rate  imposed  upon  all  successions,  direct  even 
more  than  collateral,  must  be  raised  to  a  very  high  figure.  From 
2  or  3  per  cent  the  tax  levied  upon  large  estates  must  advance  to 
10,  20,  or  30  per  cent,  and  perhaps  more,  before  it  can  have  the 
desired  effect;  and  it  must  apply  to  property  passing  from  husband 
to  wife,  father  to  child,  or  brother  to  sister.  Now  it  is  not  to  be 
supposed  that  all  the  states  will  be  convinced  simultaneously  that 
such  radical  action  is  necessary;  and  if  some  refuse  to  follow  the 
lead  of  the  others,  it  is  easy  to  see  that  there  will  ensue,  and  that 
speedily,  a  fearful  congestion  of  swollen  fortimes  in  a  few  impro- 
gressive  but  prosperous  states.  He  who  doubts  this  prediction  has 
only  to  inquire  in  what  states  the  corporations  are  now  chartered 
from  which  the  "undesirable"  fortunes  have  been  mainly  drawn. 
Of  a  certainty,  then,  the  work  is  too  large  for  the  several  states,  and 
calls  for  the  interposition  of  the  national  government. 

What  now  shall  be  said  of  the  main  proposal?  Is  it  desirable 
to  employ  the  inheritance  tax  as  an  instrument  for  reducing  swollen 
fortunes?  I  am  constrained  to  believe  that  the  inheritance  tax  is 
not  the  instrument  to  employ.  For,  in  the  first  place,  a  retributive 
inheritance  tax  could  only  remedy  some  of  the  ill  effects  of  undue 
concentration  of  wealth,  and  would  in  no  way  remove  the  causes. 
In  social  therapeutics,  as  in  medical,  it  is  sound  policy  to  aim  at 
causes  rather  than  effects;  and  this  case  is  no  exception  to  the  rule. 

....  If  for  a  single  generation  we  pimish  commercial  crime, 
extirpate  social  brigandage,  and  abolish  privilege  resting  upon  unwise 
legislation,  we  shall  probably  find  that  the  question  of  the  distribution 
of  wealth  will  have  settled  itself. 


872  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

A  second  objection  to  the  proposed  employment  of  the  inheritance 
tax  is  that  it  would  punish  the  just  man  with  the  unjust,  and  would 
check  legitimate  ambition  and  business  enterprises.  For  your  tax 
law  must  be  impersonal,  and  cannot  be  so  drawn  that  it  will  apply 
to  "tainted"  fortunes  only.  You  must  enact  that  all  fortunes  in 
excess  of  a  stated  sum  shall  be  liable  to  a  tax  of  10,  20,  50  per  cent; 
and  thus  you  punish  the  innocent  as  well  as  the  guilty.  You  might, 
indeed,  proceed  upon  the  principle  that  no  man  can  honestly  acquire 
more  than  one,  or  five,  or  ten  million  dollars;  that  theory  is  sometimes 
propounded  by  persons  who  desire  to  regulate  the  distribution  of 
wealth.  But  in  that  case  you  would  be  bound  logically  to  levy  a 
tax  of  100  per  cent  upon  all  sums  which  wealthy  malefactors  accumu- 
late in  excess  of  the  stated  amount;  otherwise  you  would  refuse  to 
recover  for  the  use  of  all  the  people  some  portion  of  the  property  of 
which  they  had  been  despoiled,  and  would  virtually  connive  at  the 
transfer  of  stolen  goods.  If  this  theory  proves  more  than  is  usually 
anticipated  or  intended,  one,  and  only  one,  other  may  be  adopted. 
We  may  proceed  upon  the  theory  that  although  a  man  may  acquire 
honestly  more  than  one,  or  ten,  or  twenty  million  dollars,  it  is  unde- 
sirable that  he  should  be  permitted  to  transmit  such  a  sum  to  his 
heirs.  Not  unnaturally,  this  idea  appeals  strongly  to  those  who 
believe  that  no  small  part  of  such  swollen  fortunes  is  likely  to  have 
been  gained  by  methods  which,  if  within  the  letter  of  the  law,  were 
contrary  to  sound  morals  and  sound  public  policy.  Without  doubt 
it  is  upon  such  considerations  that  most  advocates  of  confiscatory 
inheritance  taxes  would  rest  their  case. 

But  even  in  this  form  the  proposal  is  open  to  the  objection  that 
it  contemplates  the  establishment  of  a  hard  and  fast  rule  which  must 
be  the  same  for  fortunes  honestly  acquired  and  for  those  gained 
through  craft,  deceit  or  oppression. 

A  third  objection  is  that  taxation,  even  the  taxation  of  inheritance, 
is  usually  a  clumsy  agency  for  social  reform,  and  ordinarily  accom- 
plishes either  more  or  less  than  is  desired.  Our  present  moderate 
taxes  of  from  i  to  3  per  cent  upon  direct  inheritances  are  collected 
with  considerable  success,  since  it  is  found  that  the  average  man 
will  not  exert  himself  to  escape  them.  He  accepts  them  as  a  not 
unreasonable  method  of  collecting  revenue,  and  does  not  look  upon 
the  probate  court  as  an  agency  for  confiscating  his  fortune.  But 
no  experience  of  what  wealthy  men  do  under  our  present  laws  can 
justify  us  in  concluding  that  they  will  not  make  every  possible  effort 


PUBLIC  FINANCE  AND  TAXATION  873 

to  escape  a  tax  of  20  or  30  per  cent,  and  no  one  knows  how  much 
more.  For  any  state  to  collect  such  a  tax  would  be  substantially 
an  impossibility,  except  in  the  case  of  landed  property.  A  federal 
tax  would  not  be  so  easy  to  escape,  but  it  is  certain  that  various 
methods  of  evasion  could  and  would  be  devised. 

For  under  modern  conditions  capital  knows  no  national  bound- 
aries, and  when  facing  a  confiscatory  tax  is  generally  free  to  migrate. 
Many  capitalists,  too,  and  those  the  largest,  whom  the  social  reformer 
desires  most  to  reach,  would  choose  expatriation  rather  than  surrender, 
even  at  death,  one-third  or  one-half  of  their  fortune.  Transfers  of 
property  long  before  death  would  become  exceedingly  common,  and 
these  could  be  controlled  only  by  a  universal  system  of  taxes  on 
transfers,  than  which  nothing  could  be  a  greater  impediment  to 

legitimate  business Can  we  doubt  that  a  confiscatory  federal 

tax  would  be  subject  to  wholesale  evasion,  and  that  the  very  persons 
the  reformer  desires  to  reach  would  be  best  able  to  profit  thereby  ? 

The  constitutional  aspects  of  an  attempt  to  reduce  large  fortunes 
I  am  compelled  to  pass  without  remarks.  If  they  have  ever  been 
considered  by  advocates  of  the  plan,  they  have  evidently  been  dis- 
missed without  serious  study,  perhaps  as  trifles  about  which  the  law 
does  not  care.  I  am  unable,  also,  to  consider  the  question  whether, 
if  the  rights  of  inheritance  and  bequest  are  to  be  restricted,  we  would 
not  better  proceed  by  modifying  the  general  laws  relating  to  the 
subject,  rather  than  educate  men  in  the  belief  that  they  possess 
comparative  freedom  of  testamentary  bequest,  and  then  imdertake 
by  taxation  to  prevent  them  from  exercising  that  right.  I  venture, 
however,  to  express  the  opinion  that,  if  this  step  is  ever  to  be  taken, 
the  simpler,  surer,  yes,  the  honester,  plan  is  to  modify  the  laws  of 
inheritance  and  bequest.  Unless  we  are  ready  to  do  that,  let  us 
use  the  inheritance  tax  merely  for  the  purpose  of  collecting  a  reason- 
able revenue  from  property  passing  in  accordance  with  law. 

It  remains  to  consider  the  position  of  the  inheritance  tax  in 
our  American  system  of  taxation.  Should  it  be  a  state  tax  or  a 
federal  tax?  Should  it,  possibly,  be  levied  by  both  federal  and 
state  governments  ? 

From  the  very  beginning  the  federal  government  has  ordinarily 
contrived  to  defray  its  expenses  by  indirect  taxes,  and  it  has  today 
no  occasion  to  appropriate  any  branches  of  taxation  employed  by  the 
several  states.  True,  national  expenditures  have  increased  in  recent 
years,  and  are  still  rising.    True,  also,  increased  revenues  may  be 


874  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

needed  before  long.  But  even  when  that  time  comes  there  will  be 
no  need  of  taxing  inheritances.  By  raising  the  taxes  on  beer  and 
tobacco  to  the  rates  enforced  during  the  Spanish  War,  and  by  reintro- 
ducing a  moderate  duty  upon  tea,  not  less  than  one  hundred  millions 
of  additional  revenue  can  be  had  without  injury  to  business  or  serious 
burden  to  taxpayers.  In  this  country,  unlike  Germany,  only  the 
state  and  local  governments  are  seriously  vexed  with  problems  of 
revenue.  From  some  branches  of  taxation  they  are  debarred  by 
constitutional  restraints;  from  others,  by  economic;  while  their 
expenditures  far  exceed  the  total  federal  outlay,  and  bid  fair  to 
increase  still  more  rapidly.  Their  taxes  fall  heavily  upon  property 
and  business,  and  are  usually  so  high  that  it  is  unwise,  even  if  possible, 
to  increase  them.  All  the  revenue  that  can  properly  be  raised  by  the 
taxation  of  inheritances  is  sorely  needed  by  the  several  states,  and 
of  right  should  be  left  to  them.  For  the  federal  government  to  enter 
this  field  would  be  worse  than  a  blunder,  it  would  be  a  fiscal  crime. 

For  financial  reasons,  therefore,  I  hold  that  the  inheritance  tax 
should  be  reserved  for  the  several  states.  For  economic  and  social 
reasons,  I  maintain,  its  function  should  be  to  raise  revenue,  and  not 
to  reshape  the  distribution  of  wealth.  Upon  both  financial  and 
economic  grounds,  I  contend,  we  should  not  employ  the  tax  in  hazard- 
ous schemes  for  the  regulation  of  fortunes. 


253.     INCOME  TAXES 

a)      THE   FEDERAL   INCOME   TAX 

The  sixteenth  Amendment  to  the  Constitution,  proclaimed  in  Feb- 
ruary, 1 913,  permitted  the  federal  government  to  levy  an  income  tax 
without  apportionment  among  the  states  on  the  basis  of  population. 

The  tariff  act  of  October,  19 13,  included  an  income  tax  with  the 
following  provisions: 

The  tax  applies  to  all  citizens  of  the  United  States,  resident  or 
non-resident,  resident  aliens  as  to  all  income,  and  non-resident  aliens 
as  to  the  income  derived  from  property  owned  or  business  carried  on 
in  the  United  States. 

Individuals  are  taxed  on  the  income  derived  from  any  source 
(except  the  value  of  property  acquired  by  gift  or  descent)  but  are 
allowed  the  following  deductions:  (i)  expenses  of  carrying  on  their 
business,  excluding  personal  living  or  family  expenses;  (2)  interest 
paid  on  indebtedness;  (3)  taxes,  except  special  assessments;  (4)  busi- 


PUBLIC  FINANCE  AND  TAXATION  875 

ness  losses  of  the  year;  (5)  bad  debts  written  off;  (6)  reasonable 
allowance  for  depreciation;  (7)  dividends  on  the  stock  of  a  corpora- 
tion paying  an  income  tax;  (8)  income,  the  tax  on  which  has  been 
deducted  at  the  source;  (9)  $3,000  if  single;  and  $4,000  if  the  indi- 
vidual is  married  and  lives  with  husband  or  wife;  (10)  interest 
received  on  the  obligations  of  a  state  or  poUtical  subdivision  thereof 
or  of  the  United  States  or  its  possessions;  (11)  compensation  of  all 
officers  and  employees  of  a  state  or  any  poHtical  subdivision  thereof. 

The  normal  tax  of  i  per  cent  is  levied  on  this  annual  income,  and 
on  incomes  in  excess  of  $20,000  an  additional  annual  tax  must  be 
paid,  as  follows:  i  per  cent  on  the  amount  by  which  the  total  net 
income  exceeds  $20,000  but  does  not  exceed  $50,000;  2  per  cent  on 
the  amount  over  $50,000  but  not  over  $75,000;  3  per  cent  on  the 
amount  over  $75,000  but  not  over  $100,000;  4  per  cent  on  the  amount 
over  $100,000  but  not  over  $250,000;  5  per  cent  on  the  amount  over 
$250,000  but  not  over  $500,000;  and  6  per  cent  on  the  excess  above 
$500,000. 

The  individual's  statement  of  income  is  due  on  March  i;  he  is 
notified  of  the  amount  of  his  tax  by  June  i,  and  the  tax  must  be  paid 
by  June  30  of  each  year. 

The  tax  is  deducted  at  the  source:  (i)  by  persons  or  companies 
acting  as  lessees,  mortgagors,  trustees,  employers,  etc.,  whenever  inter- 
est, rent,  salaries,  wages,  or  other  gains  or  profits  are  paid  by  them 
to  any  one  person  to  an  amount  exceeding  $3,000  a  year;  (2)  by 
corporations  or  associations  paying  interest  on  their  bonds,  mort- 
gages, or  similar  obligations  even  if  the  payment  does  not  exceed 
$3,000  a  year,  and  from  coupons  or  checks  in  payment  of  bonds  or 
other  obligations  or  dividends  upon  the  stock  of  foreign  corporations 
where  the  coupons  or  checks  are  not  payable  within  the  United 
States.  Any  person  whose  income  is  thus  deducted  at  the  source 
who  may  be  entitled  to  any  exemption  must  file  a  written  claim 
therefor. 

All  corporations,  joint  stock  companies,  and  associations  organ- 
ized in  the  United  States,  not  including  partnerships,  and  (as  to  the 
proportion  of  their  business  done  in  the  United  States)  foreign  cor- 
porations, are  taxable  upon  their  entire  net  income  arising  or  accruing 
from  all  sources.  Certain  classes  of  corporations  are  exempted  from 
this  tax,  including  labor,  agricultural,  or  horticultural  organizations, 
fraternal  beneficiary  societies,  charitable,  scientific,  or  educational 
institutions,  etc.    The  tax  is  i  per  cent  of  the  entire  net  income,  subject 


876  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  deductions  for  ordinary  and  necessary  expenses  of  maintenance 
and  operation,  net  losses  sustained,  reasonable  depreciation,  taxes, 
and  interest  on  indebtedness  to  an  amount  not  exceeding  one-half 
the  sum  of  the  interest-bearing  indebtedness  and  the  paid-up  capital 
stock  of  the  company.  Returns  which  must  show  the  amount  of 
these  various  items  may  be  made  for  either  the  calendar  year  or  the 
fiscal  year  of  the  corporation. 

b)      THE   INCOME   TAX   IN    WISCONSIN* 

A  brief  review  of  the  principal  provisions  of  the  law  may  be 
of  interest.  The  term  "income"  is  made  to  cover  all  rent  of  real 
estate,  wages,  salaries,  dividends,  business  profits,  interest  upon 
investments,  royalties,  and  all  income  derived  from  any  source  not 
exempted  by  law. 

The  law  applies  to  all  residents  of  the  state,  and  to  non-residents 
upon  such  income  as  is  derived  from  sources  within  the  state  or  within 
its  jurisdiction.  It  also  covers  corporations,  joint  stock  companies 
or  associations  organized  for  profit,  and  copartnerships. 

The  income  of  a  resident  derived  from  business  partly  within  and 
partly  without  the  state  is  taxed  only  upon  that  part  of  the  income 
derived  from  the  business  within  the  state.  Income,  however,  that 
is  derived  from  rentals,  stocks,  bonds,  securities,  or  evidences  of  indebt- 
edness is  taxed  on  the  full  amount  under  the  rule  that  intangible 
property  follows  the  residence  of  the  owner  for  purposes  of  taxation. 

The  family  is  taxed  as  a  unit,  the  income  of  the  wife  and  chil- 
dren under  eighteen  years  of  age  being  added  to  that  of  the  husband 
when  they  are  not  living  separately  from  husband  or  parents. 

Fairly  liberal  exemptions  are  allowed  individuals.  If  single, 
income  up  to  and  including  $800  is  exempt;  in  the  case  of  husband 
and  wife,  $1,200  is  exempt,  and  for  each  child  under  the  age  of  eighteen 
years  an  additional  exemption  of  $200  is  allowed. 

Individuals  are  also  allowed  certain  deductions,  such  as  ordinary 
and  necessary  expenses  actually  paid  within  the  year  in  carrying 
on  the  profession,  occupation  or  business  from  which  the  income  is 
derived,  including  a  reasonable  allowance  for  depreciation  of  the 
property  from  which  the  income  is  derived,  losses  during  the  year  not 
compensated  for  by  insurance  or  otherwise,  dividends  or  income 

"  Adapted  from  the  Third  Biennial  Report  of  the  Minnesota  Tax  Commission 
(IQ12),  pp.  154-64- 


PUBLIC  FINANCE  AND  TAXATION  877 

received  from  investments  otherwise  taxed  under  the  income  tax 
law,  interest  paid  on  indebtedness,  interest  received  from  exempt 
securities,  salaries  and  pensions  received  from  the  United  States 
government.  Inheritances  upon  which  the  inheritance  tax  has  been 
paid,  and  insurance  to  the  amount  of  $10,000  received  by  legal  depend- 
ents of  the  decedent,  can  also  be  deducted  from  income. 

No  exemptions  are  allowed  corporations,  joint  stock  companies  or 
associations,  but  certain  deductions,  similar  to  those  allowed  indi- 
viduals, are  permitted.  In  addition,  salaries  of  officers  and  employees 
may  also  be  deducted,  provided  that  the  name,  address,  and  amount 
paid  each  officer  or  employee  to  whom  a  compensation  of  $700  or 
more  was  paid  during  the  year  is  reported. 

Deductions  can  also  be  made  for  taxes  paid  in  other  states  upon 
the  source  from  which  the  income  taxed  under  the  law  is  derived. 

The  tax  rate  is  progressive,  bearing  more  lightly  upon  those 
with  small  incomes  and  more  heavily  on  those  with  larger  ones. 
It  begins  with  i  per  cent  on  the  first  $1,000  of  taxable  income  and 
increases  to  ij  per  cent  on  the  second  $1,000,  15  per  cent  on  the  third 
$1,000,  I J  per  cent  on  the  fourth  $1,000,  2  per  cent  on  the  fifth  $1,000, 
and  one-half  per  cent  more  upon  each  additional  $1,000  up  to  5^ 
per  cent  on  the  twelfth  $1,000.  On  the  excess  above  $12,000  the 
rate  remains  stationary  at  6  per  cent. 

The  rates  are  cumulative.  For  example,  a  taxable  income  of 
$1,000  would  pay  $10;  if  the  income  amounted  to  $2,000  the  tax 
would  be  $22.50,  on  $3,000  it  would  be  $37.50,  on  $4,000,  $55,  and 
upon  $5,000  it  would  amount  to  $75.  If  an  individual  has  paid 
personal  property  taxes  he  is  allowed  an  offset  for  the  full  amoimt 
paid  upon  production  of  this  tax  receipt  if  such  taxes  were  upon 
the  property  or  business  from  which  the  income  is  derived. 

The  table  of  rates  for  corporations,  joint  stock  companies,  and 
associations  is  based  on  a  somewhat  novel  principle  and  differs 
materially  from  that  of  individuals.  An  attempt  is  made  to  adjust 
such  rates  on  the  earning  power  of  the  corporation.  The  earning 
power  in  turn  is  based  on  the  relation  of  the  taxable  income  to  the 
assessed  value  of  the  property  used  in  producing  the  income.  The 
theory  of  the  corporation  rate  is  that  the  larger  the  investment  in 
proportion  to  the  profits  earned,  the  lower  the  rate  should  be.  Fol- 
lowing this  theory,  the  law  provides  that  if  the  taxable  income  equals 
I  per  cent  or  less  of  the  assessed  value  of  the  property,  the  rate  shall 
be  one-half  of  i  per  cent  upon  the  income.     If  the  taxable  income  is 


878  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

more  than  i  per  cent  but  does  not  exceed  2  per  cent,  the  rate  shall 
be  I  per  cent.  If  more  than  two  per  cent  and  less  than  3  per  cent,  the 
rate  is  fixed  at  i^  per  cent,  and  so  on  by  steps  of  i  per  cent  for  the 
proportion,  and  one-half  of  i  per  cent  for  the  rate,  until  6  per  cent  is 
reached  upon  profits  amounting  to  12  per  cent.  The  rate  on  profits 
amounting  to  more  than  12  per  cent  remains  uniform  at  6  per  cent. 

The  most  striking  feature  of  the  administrative  scheme  is  the 
degree  to  which  the  work  is  centralized  in  the  tax  commission.  While 
other  states  that  have  experimented  with  income  taxation  have  usually 
entrusted  its  enforcement  to  local  authorities,  Wisconsin  has  reversed 
the  rule  and  is  trying  centralized  authority. 

The  district  assessors  assess  the  income  of  individuals  and  the 
tax  commission  the  income  of  corporations,  joint  stock  companies, 
and  associations.  The  income  tax  is  collected  in  the  same  manner 
as  personal  property  taxes.  Such  taxes  are  apportioned  10  per  cent 
to  the  state,  20  per  cent  to  the  county,  and  70  per  cent  to  the  town, 
city,  or  village  in  which  the  tax  was  assessed,  levied  and  collected. 

In  point  of  revenue  the  income  tax  law  in  Wisconsin  has  in  its 
first  year  more  than  met  the  expectations  of  its  advocates.  The 
income  tax  assessed  this  year  will  exceed  $3,300,000.  This  is  quite 
a  remarkable  showing  for  the  first  year,  especially  when  compared 
with  results  obtained  in  other  states  that  have  experimented  with 
similar  laws.  It  even  exceeds  the  amount  collected  under  the  first 
federal  income  tax  law  in  1863  by  more  than  $550,000,  although  that 
law  applied  to  the  entire  country. 

Of  the  total  tax,  corporations  will  contribute  about  $2,200,000,  or 
nearly  665  per  cent  of  the  total,  and  individuals  and  firms  about 
$1,110,000,  or  T,^^  per  cent  of  the  total  tax.'  It  is  estimated  that  the 
average  rate  on  corporations  will  be  between  5  and  6  per  cent,  while 
the  rate  on  individuals  and  firms  will  be  slightly  in  excess  of  2  per  cent. 

The  preceding  figures  represent  the  total  income  tax  assessed 
from  which,  of  course,  a  very  considerable  deduction  will  be  made  for 
taxes  paid  on  personal  property.  No  accurate  data  are  yet  available 
as  to  how  much  this  offset  will  be,  but  from  investigations  already 
made  it  is  estimated  that  the  net  tax  on  individuals  will  be  about 
80  per  cent,  and  on  corporations  about  50  per  cent  of  the  total  income 
tax  assessed.  On  this  basis  the  income  tax  will  yield  net  above  the 
personalty  offset  about  $1,980,000,  of  which  amount  the  state  will 
receive  $198,000,  the  counties  $396,000,  and  the  towns,  cities,  and 


PUBLIC  FINANCE  AND  TAXATION  87^ 

villages  $1,387,000.  These  amounts  represent  clear  gains  in  public 
revenues  resulting  from  the  income  tax  law. 

The  advocates  of  the  income  tax  have  always  contended  that 
eventually  such  a  tax  would  enable  the  state  to  exempt  personal 
property  from  taxation,  except  public  utilities  and  banks,  without 
impairing  the  public  revenues.  This  could  almost  be  done  the  first 
year.  The  entire  tax  levied  on  personal  property  this  year  is  esti- 
mated to  yield  about  $4,100,000,  an  amount  only  about  $800,000 
in  excess  of  the  income  tax.  It  is  not  improbable  that  within  the 
next  two  or  three  years  the  personal  property  tax,  with  the  exceptions 
above  indicated,  could  be  entirely  abolished  without  any  diminution 
in  the  public  revenues. 

Centralized  administration  is  the  strong  feature  of  the  Wisconsin 
income  tax  law  and  much  of  its  success  is  undoubtedly  due  to  this 
important  provision.  It  is  also  strong  in  many  other  features  not 
heretofore  included  in  the  income  tax  laws  of  other  states.  They 
are  thus  summarized  by  a  member  of  the  Wisconsin  state  tax  com- 
mission :' 

In  the  mind  of  practically  everybody  connected  with  the  administra- 
tion of  the  Wisconsin  tax,  three  more  or  less  novel  conclusions  have  been 
established  beyond  reasonable  doubt. 

First,  the  American  taxpayer  is  honest  and  will  tell  the  truth  provided 
you  take  the  trouble  to  ask  him  direct  questions  and  provided  the  rate 
of  taxation  is  reasonable  and  not — as  the  ordinary  property  tax  rate  is  on 
securities — confiscatory.  The  maximum  rate  under  the  Wisconsin  income 
tax  is  6  per  cent,  whereas  the  old  property  tax  frequently  took  from  20 
to  60  per  cent  of  the  net  income  from  credits  when  by  some  unhappy  chance 
the  assessor  happened  to  find  them 

The  second  conviction  noted  above  is  simply  that  the  idea  of  collection 
at  source  has  been  greatly  exaggerated.  A  very  large  majority  of  the 
stockholders  of  the  corporations  represented  in  any  state  live  in  that  state. 
With  respect  to  these  the  tax  can  be  collected  at  the  source.  Moreover, 
every  corporation  doing  business  in  a  state  can  be,  and  in  Wisconsin  has 
been,  asked  to  report  all  the  stockholders  and  salaried  employees  living  in 
Wisconsin  with  the  dividends  and  salaries  paid  to  them,  respectively. 
Fiurthermore,  corporation  bonds  may  be  defined  as  an  interest  in  the  busi- 
ness and  the  tax  is  collected  directly  from  the  corporation,  the  corporation 

» The  tax  was  primarily  an  urban  tax.  Over  40  per  cent  of  the  tax  was  assessed 
in  Milwaukee  alone,  and  more  than  80  per  cent  in  the  seventeen  counties  contain- 
ing cities  of  the  second,  third,  and  fourth  classes. 

'  Professor  T.  S.  Adams. 


88o  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

being  authorized  to  deduct  the  tax  from  the  interest  when  it  has  not  cove- 
nanted to  pay  the  tax  itself.  This  has  been  done  in  Wisconsin.  The 
remaining  forms  of  income  will  be  taken  care  of  by  the  honesty  of  the 
average  taxpayer  when  the  rate  is  reasonable. 

This  surprising  notion  of  the  honesty  of  the  taxpayers  is  not  mere 
sentimentalism  and  not  mere  buncombe.  It  is  completely  borne  out  by 
the  facts.  The  impression  of  practically  everybody  connected  with  the 
administration  of  the  Wisconsin  income  tax  is  that  more  than  90  per  cent 
of  the  net  income  theoretically  taxable  under  the  Wisconsin  law  has  been 
voluntarily  returned. 

The  third  novel  conclusion  is  that  a  state  income  has,  as  contrasted 
with  the  federal  income  tax,  more  natural  advantages  than  disadvantages. 
It  may  have  where  properly  administered,  and  does  have  in  Wisconsin, 
ten  times  the  local  knowledge  because  it  can  have  ten  times  the  number 
of  assessors  by  combining  the  machinery  of  the  general  tax  system  with 
the  machinery  of  the  income  tax.  In  literally  hundreds  of  cases  the  writer 
has  discovered  that  reports  under  the  Wisconsin  income  tax  were  more 
carefully  made  than  under  the  federal  corporation  excise  tax  and  fewer 
doubtful  questions  decided  in  favor  of  the  taxpayer. 


254.     SEPARATION  OF  STATE  AND  LOCAL  REVENUES' 

ADVANTAGES   OF   SEPARATION 

The  advantages  to  be  derived  from  the  separation  of  state  and 
local  revenues  are  declared  to  be:  (i)  conformity  of  tax  system  to 
natural  division  of  government;  (2)  greater  equality  of  assessment; 
(3)  lower  tax  rates;  (4)  the  elimination  of  the  conflicts  between  city 
and  country;  and  (5)  a  greater  flexibility  of  taxes  and  larger  adapta- 
tion of  means  to  end.'  The  growth  of  statewide  business  has  made 
it  necessary  to  materially  modify  the  tax  system.  The  taxation  of 
corporations  by  special  acts  has  tended  steadily  to  separate  the  sources 
of  the  state's  revenue  from  those  of  the  local  governments.  It  is 
felt  that  in  addition  to  securing  a  natural  division  of  taxing  function 
based  upon  the  character  of  the  government,  such  separation  would 
eliminate  the  efforts  now  made  to  keep  assessments  lower,  since  the 

'  Adapted  from  the  First  Biennial  Report  of  the  Minnesota  Tax  Commission 
(1908),  pp.  204  ff. 

'  Professor  Seligman,  in  Proceedings  of  National  Tax  Conference,  IQ07,  p.  4gt 


PUBLIC  FINANCE  AND  TAXATION  88 1 

question  would  then  become  a  local  one.  Local  tax  rates  would  be 
reduced  by  the  amount  of  the  former  state  tax  and  some  of  the  old 
causes  of  strife  between  city  and  country  over  the  assessments  no 
longer  existing,  would  do  away  with  that  friction,  since  each  com- 
munity would  in  a  large  measure  determine  its  own  basis  of  assessment. 
And  finally,  each  community  could  work  out  for  itself  the  adjustment 
between  assessment,  taxes,  and  expenditures  which  seemed  wise  to 
the  people  of  the  district. 

OBJECTIONS   TO   SEPARATION   OF   STATE   AND   LOCAL   REVENUES 

To  these  but  briefly  stated  advantages,  some  objection  can  be 
and  has  been  made.  The  original  purpose  in  separating  state  and 
local  revenues  was  to  remove  the  problem  of  equalization  as  a  state 
issue,  but  with  this  has  gone  in  the  later  statements  of  the  plans  the 
home  rule  idea  of  taxation.  The  only  freedom  the  local  governments 
would  have  would  be  in  the  matter  of  exemptions,  since  the  state 
would  certainly  not  give  a  local  government  the  power  to  make  sub- 
stitutes for  the  personal  property  tax.  One  can  hardly  conceive  of  a 
more  hodgepodge  system  of  taxation  than  that  likely  to  arise  out  of 
a  system  of  home  rule  where  each  community  was  permitted  to  do  as 
it  pleased.  Home  rule  becomes  in  its  last  analysis,  where  such  powers 
of  legislation  are  not  granted  to  the  local  governments,  a  synonym 
for  the  single  tax  of  real  estate.'  Here  again  the  question  may  arise 
4S  to  the  equality  of  assessment  as  between  adjoining  local  govern- 
-nent  districts.  In  one  instance  the  assessment  may  be  high,  in  the 
»ther  low,  yet  the  owners  may  be  competitors  in  the  same  market 
with  fundamentally  different  tax  burdens  on  practically  the  same  kind 
of  property.  In  fact,  the  argument  and  the  necessities  of  the  situa- 
tion seem  to  point  to  centralization  of  assessment  methods  and  the 
removal  of  the  more  objectionable  features  of  the  personal  property 
tax  through  the  taxation  of  credits,  moneys,  stock  and  bonds  at  their 
source,  namely,  as  they  are  found  in  the  possession  of  corporations. 
This,  however,  as  a  system  is  a  long  way  from  one  developed  upon 
the  avowed  purpose  of  separating  the  state  from  the  local  revenues. 

METHODS   OF   SECURING   SEPARATION 

Two  methods  of  securing  the  separation  of  state  from  local 
revenues  have  been  suggested: 

I.  The  first  method  proposes  the  abandonment  of  the  general 
property  tax  as  a  means  of  raising  state  revenues  and  the  substitution 

'  Professor  T.  S.  Adams,  in  National  Tax  Conference,  1907,  p.  518. 


882  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

in  its  place  of  special  corporation  taxes,  tax  on  inheritances,  license 
taxes,  etc.  It  is  not,  however,  every  state  that  has  sources  of  revenue 
large  enough  to  make  it  possible  to  raise  all  the  revenue  needed  from 
the  tax  on  corporation  and  inheritances.  The  best  that  can  be  done 
in  states  where  such  is  the  case  is  to  develop  as  far  as  possible  the 
special  taxes  on  corporations  and  inheritances  and  rely  for  the  balance 
upon  the  taxation  of  the  general  property  in  the  state. 

2.  In  order  to  meet  the  difficulty  referred  to  above,  that  of 
insufficient  sources  of  revenue  to  permit  of  separation  of  state  and 
local  revenues,  it  has  been  proposed  to  call  upon  the  local  govern- 
ments to  contribute  to  the  expenses  of  the  state  in  proportion  to 
their  expenditures  and  by  this  means  secure  what  was  accomplished 
by  the  special  taxation  of  corporations. 

The  objection  urged  against  this  plan  is  the  check  it  places 
upon  local  expenditures.  This  would  be  especially  true  of  new  com- 
munities that  are  struggling  to  secure  better  roads,  pavements, 
sewers,  electric  lights,  and  schools.  Such  communities  would  be 
punished  for  the  expenditures  made  for  improvements.  While  this 
objection  in  the  long  run  would  not  hold  good  it  is  doubtful  if  the 
legislatures  of  any  considerable  number  of  states  would  look  with 
favor  upon  the  plan.  They  would  prefer  the  more  direct  way  of 
taxing  corporations. 

An  objection  to  separation  as  distinct  from  centralization,  which 
can  be  given  at  least  an  early  place  in  the  list,  is  the  violation  of  the 
principle  of  a  budget  which  ensues  when  the  emphasis  is  placed  upon 
separation  of  state  from  local  revenues.  That  principle  may  be 
formulated  in  this  fashion:  no  greater  siun  shall  be  raised  by  taxa- 
tion than  is  necessary  to  meet  the  expenses  of  government.  The 
taxation  of  corporations  without  regard  to  the  returns  likely  to  be 
received  from  them  may  or  may  not  produce  sufficient  revenue; 
if  it  produces  more  than  enough  the  resulting  effects  on  legislative 
action  and  the  attitude  of  the  people  are  by  no  means  happy.  In 
other  words,  elasticity  of  revenue  is  almost  an  essential  of  good 
government.  In  addition  to  this  objection  there  is  also  the  loss  of 
interest  by  the  people  in  the  expenditures  of  the  state  when  the 
revenues  for  state  purposes  are  raised  entirely  from  indirect  sources. 
It  is  not  to  be  argued  from  this  statement  that  the  taxes  for  common- 
wealth purposes  shall  be  raised  by  direct  taxation  alone,  but  it  does 
follow  that  the  state  will  do  well  not  to  separate  state  from  local 
revenues  to  the  degree  called  for  by  the  advocates  of  the  idea,  but 


PUBLIC  FINANCE  AND  TAXATION  883 

secure  incidental  separation  without  giving  over  the  right  to  lay  a 
direct  tax.  If  you  do  not  have  separation  of  state  and  local  revenues, 
it  is  said,  the  problem  of  equalization  is  an  ever  present  one.  This 
problem,  however,  is  to  be  met  by  centralization  of  assessment,  now 
made  possible  by  the  creation  of  permanent  tax  commissions.  As 
said  above,  the  placing  of  local  taxation  at  the  will  of  the  local  govern- 
ment cannot  result  in  any  great  betterment  of  the  situation,  but  is 
hkely  to  produce  confusion,  inequality  of  taxation,  and  overlapping  ' 
due  to  the  narrow  confines  of  the  local  governments. 

25s.    THE  TAXES  ON  LAND  IN  WESTERN  CANADA* 

The  more  recent  trend  of  sentiment  in  favor  of  the  taxation  of 
land  values  as  the  principal  source  of  state  and  local  revenues  is 
in  the  direction  of  a  modified  form  of  the  Henry  George  theory  of 
community  ownership.  That  theory  does  not  appeal  to  the  average 
American  citizen  in  whom  the  desire  for  ownership  is  almost  as 
deeply  rooted  as  the  love  of  home  and  famOy.  He  cannot  or  will 
not  reconcile  himself  to  the  theory  that  the  growth  in  the  value 
of  land  is  a  communal  interest  and  should  be  shared  in  common  by 
all  the  people.  The  new  school  confines  its  advocacy  of  the  land 
tax  to  the  simple  proposition  of  making  land  values  the  basis  of 
state  and  local  taxation,  exempting  improvements  and  all  forms 
of  personal  property.  The  Henry  George  advocates  would  socialize 
land;  the  new  school  would  simply  use  it  as  the  sole  basis  of  state 
and  local  taxation. 

A  brief  review  of  the  taxing  system  of  the  four  western  prov- 
inces— Manitoba,  Saskatchewan,  Alberta,  and  British  Columbia — 
may  be  of  interest. 

TAXATION  IN  MANITOBA 

The  province  of  Manitoba  imposes  no  provincial  tax  on  real  or 
personal  property.  The  public  revenues,  in  addition  to  the  Dominion 
subsidy,  are  derived  principally  from  provincial  lands,  liquor  licenses, 
railroad,  corporation,  and  inheritance  taxes,  and  other  special  taxes 
and  fees.  Mvmicipalities,  however,  are  authorized  to  impose  a  tax 
on  both  real  and  personal  property,  subject  to  certain  exemptions. 
The  real  estate  exemptions  are  similar  to  our  own  and  include  public 
property,  and  property  used  for  educational,  religious,  and  charitable 

» Adapted  from  the  Third  Biennial  Report  of  the  Minnesota  Tax  Commission, 
(191 2),  pp.  167-74. 


884  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

purposes.  Creameries  and  cheese  factories  are  also  exempt.  Per- 
sonal property  exemptions  include  household  goods  and  effects,  and 
the  live  stock  and  farm  tools  and  implements  of  farmers  used  and 
kept  on  the  premises  of  the  owner.  Cities  and  villages  are  authorized 
under  certain  conditions  to  impose  a  business  tax  in  lieu  of  personal 
property  ta.xes. 

Winnipeg,  the  principal  city  of  the  province,  derives  its  pubhc 
revenue  from  real  estate,  business,  and  franchise  taxes.  Land  for 
purposes  of  taxation  is  assessed  at  full  value  and  buildings  and 
improvements  at  two-thirds  of  full  value.  The  rate  of  taxation  in 
191 1  was  13.25  mills. 

The  business  tax  was  introduced  in  Winnipeg  in  1893  to  take 
the  place  of  personal  property  taxes.  Originally  the  tax  was  based 
on  measurement,  that  is,  on  the  number  of  square  feet  occupied 
by  the  business.  This  system  was  changed  in  1906  to  a  rental  basis. 
The  tax  is  now  imposed  on  the  rental  value  of  the  property  occupied 
by  the  business.  The  assessed  rental  value  may  be  more  or  less 
than  the  actual  rent  paid  if,  in  the  opinion  of  the  assessment  com- 
missioner, the  true  rental  value  is  more  or  less  than  the  actual  rent 
paid.  The  present  rate  is  6|  per  cent  on  the  rental  value.  Under 
this  rate,  if  the  rental  value  of  a  store  building  was  $3,000  per  year 
the  tax  would  amount  to  $200.  The  total  tax  derived  from  this 
source  amounted  to  about  $270,000  in  1911. 

While  the  business  tax  in  Winnipeg  does  not  give  entire  satis- 
faction, it  is  regarded  with  greater  favor  than  the  personal  property 
tax. 

TAXATION   IN   SASKATCHEWAN 

Saskatchewan,  the  first  province  west  of  Manitoba,  imposes  no 
provincial  tax  on  real  or  personal  property.  The  provincial  revenues 
are  derived  from  sources  similar  to  that  of  Manitoba.  The  power  to 
tax  real  estate  and  to  impose  business  and  income  taxes  is  delegated 
to  the  municipalities,  but  they  are  not  authorized  to  tax  personal 
property.  Land  is  assessed  at  full  value,  but  buildings  and  improve- 
ments cannot  be  assessed  at  more  than  60  per  cent  of  full  value. 
Under  a  law  passed  in  1910  cities  and  villages  may  reduce  the  assess- 
ment on  buildings  and  improvements  15  per  cent  per  year  until 
entirely  eliminated.  This  law  will  enable  cities  and  villages  to  bring 
about  entire  exemption  of  buildings  and  improvements  within  a 
period  of  four  years  if  they  so  desire.  Many  of  the  cities  and  villages 
are  taking  advantage  of  this  provision  of  law  and  will  eventually 
entirely  exempt  this  class  of  property  from  taxation. 


PUBLIC  FINANCE  AND  TAXATION  88$ 

The  business  tax  in  the  cities  of  Saskatchewan  is  based  on  the 
floor  space  occupied  by  the  business.  Businesses  are  classified  and 
a  different  rate  applied  to  each  class.  The  rate  of  assessment  varies 
from  50  cents  to  $8  per  square  foot,  according  to  the  class  of  business. 
The  lowest  rate  is  on  flour  mills  and  sash  and  door  factories,  and  the 
highest  on  bankers,  brokers,  and  financial  institutions.  The  business 
tax  seems  to  give  general  satisfaction. 

An  interesting  example  of  the  working  of  the  two  systems  of 
taxation — taxing  land  and  improvements  and  taxing  land  only — • 
was  exemplified  in  the  city  of  Lloydminster,  half  of  which  is  in 
Saskatchewan  and  half  in  Alberta.  That  part  of  the  city  which 
is  in  Saskatchewan  levied  a  tax  on  buildings  and  improvements 
as  well  as  on  land,  while  the  part  in  Alberta  taxed  the  land  only. 
The  result  was  that  the  Alberta  side  forged  ahead  of  the  Saskatche- 
wan side,  and  while  most  of  the  retail  business  was  done  in  the 
latter,  all  of  the  better  class  of  residences  were  built  on  the  Alberta 
side. 

Commenting  on  the  exemption  of  buildings  and  improvements 
from  taxation,  the  minister  of  municipal  affairs  of  Saskatchewan 
in  a  report  issued  in  191 1  says: 

In  connection  with  cities  might  be  mentioned  the  growing  interest  in 
the  single  tax  system  and  the  application  in  our  cities  of  some  of  the  prin- 
ciples propounded  by  Henry  George.  It  has  often  been  stated,  and  should 
be  as  often  repeated,  that  the  public-spirited  owner  of  a  lot,  who  erects 
thereon  a  building  which  improves  the  street  and  enhances  the  value  of 
the  surrounding  property,  should  not  be  made  to  pay  a  penalty  by  way  of 
taxes  as  a  result  of  his  efforts  and  enterprise  while  the  neighboring  land 
owner,  who  keeps  vacant  the  adjoining  lot  for  speculative  purposes,  enjoys, 
without  effort  on  his  part,  the  fruits  of  another's  enterprise  in  making 
proper  use  of  his  holding.  On  the  other  hand,  the  fact  is  not  to  be  over- 
looked that  a  building  is  more  of  a  charge  on  the  municipality  by  way  of 
police  and  fire  protection  than  is  a  vacant  lot.  It  has  many  opponents  in 
eastern  provinces,  but  the  examples  set  by  the  cities  of  Vancouver  and 
Edmonton  and  the  sentiments  in  this  regard  expressed  by  many  leading 
municipal  men  in  the  province  go  to  show  that  it  has  many  strong  advocates 
in  western  Canada. 

TAXATION   IN   ALBERTA 

The  tax  system  of  Alberta  is  similar  to  that  of  Saskatchewan,  with 
the  difference  that  buildings  and  improvements  are  now  exempt  from 
taxation  in  almost  the  entire  province.  Except  in  one  or  two  cities, 
personal  property  is  also  exempted  from  taxation.    A  peculiar  feature 


886  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  the  Alberta  taxing  system  is  a  tax  levied  in  rural  municipalities  at 
so  much  per  acre  without  regard  to  the  value  of  the  land.  In  such 
municipalities  a  tax  of  one  and  one-quarter  of  a  cent  per  acre  is  levied 
for  educational  purposes,  and  an  additional  tax  varying  from  ij 
cents  to  5  cents  an  rcre  for  general  purposes.  A  tax  levied  on  the 
acre  principle  has  little  to  commend  it,  but  as  the  rate  is  quite  low 
it  seems  to  be  accepted  without  much  criticism. 

In  Calgary,  the  principal  city  of  Alberta,  land  is  assessed  at 
full  value.  Prior  to  1909  buildings  and  improvements  were  assessed 
at  full  value.  In  1909  the  assessment  was  made  at  80  per  cent,  in 
1910  at  50  per  cent,  and  in  191 1  at  25  per  cent  of  full  value.  Under 
a  recent  law  the  assessment  on  buildings  and  improvements  must  be 
reduced  at  least  10  per  cent  each  year  until  entirely  eliminated. 

Edmonton,  the  capital  city  of  the  province,  is  the  only  city  of 
importance  in  the  Canadian  West  that  has  adopted  the  single  tax 
system  in  its  entirety.  A  tax  on  land  values  alone  is  the  only  tax 
levied  in  that  city.  The  city  has  had  a  marvelous  growth  in  the 
past  few  years,  but  whether  or  not  such  growth  has  been  due  in 
part  to  its  tax  system  is  a  question  of  some  dispute.  That  it  is 
giving  general  satisfaction  is  evidenced  by  the  fact  that  nearly  every 
resident  of  the  city  is  an  ardent  single  taxer. 

TAXATION   IN   BRITISH   COLUMBIA 

There  is  no  provincial  tax  on  real  estate  in  British  Columbia, 
except  in  unorganized  districts.  A  provincial  tax,  however,  is  levied 
on  personal  property  and  incomes.  Household  goods,  money  and 
credits,  and  several  other  classes  of  personal  property  are  exempt  from 
taxation.  Land  for  purposes  of  taxation  is  classified  as  improved, 
wild,  timber,  and  coal  lands,  and  a  different  rate  of  taxation  imposed 
on  each  class.  The  rate  for  the  revenue  year  of  1910-1911  was  one- 
half  of  I  per  cent  on  the  assessed  value  of  improved  lands,  4  per  cent 
on  wild  lands,  2  per  cent  on  timber  land,  and  i  per  cent  on  worked 
and  2  per  cent  on  unworked  coal  lands.  Mines  are  taxed  on  the 
output,  the  rate  being  2  per  cent  on  the  value  of  the  ore  mined. 

In  1911  a  royal  commission  on  taxation  was  appointed  to  investi- 
gate the  revenue  system  of  the  province  and  to  make  such  recom- 
mendations as  it  deemed  expedient  for  the  improvement  of  its  taxing 
system.  After  a  careful  investigation,  the  commission  recommended, 
among  other  things,  the  abolition  of  the  personal  property  tax,  and 


PUBLIC  FINANCE  AND  TAXATION  887 

the  tax  on  buildings  and  improvements  on  lands.     On  the  latter 
question  the  commission  says: 

Further,  it  has  been  argued,  again  as  a  matter  of  principle,  that  improve- 
ments on  lands  should  be  exempt  from  taxation  altogether,  and  that  the 
basis  of  valuation  for  the  purposes  of  taxation  should  be  the  reasonable 
sale  price  of  the  land  in  a  state  of  nature,  due  regard  being  had  in  fixing 
the  price  to  all  the  conditions  as  to  location,  facility  of  access,  fertihty, 
and  so  on,  that  would  influence  a  purchaser.  On  such  a  theory  it  would 
follow  that  all  lands  of  the  same  class  or  character  would  not  necessarily 
be  valued  at  the  same  rate,  and  also  the  use  to  which  the  owner  may  put 
the  land  would  not  be  taken  into  account.  One  might  put  a  building  on  his 
land;  another  might  grow  hay;  another  might  use  his  as  a  pasture.  All 
these  uses  would  be  beneficial  to  the  community,  but,  according  to  such 
theorists,  they  ought  not  to  be  the  determining  causes  of  the  value  of  the 
land.  If  they  were,  the  value  would  fluctuate  with  the  changing  uses  to 
which  the  land  might  be  put  from  time  to  time. 

Further,  it  has  been  contended  that  an  improved  piece  of  land  should 
be  valued  for  purposes  of  taxation  at  the  same  value  as  a  similar  piece  of 
unimproved  land,  but  that  in  valuing  the  improved  land  the  value  of  the 
improvements  should  not  be  considered  except  for  the  purposes  of  arriving 
at  the  value  of  the  land  itself,  and  that  this  true  value  should  be  the  selling 
value  of  the  land  subject  to  deduction  for  the  present  value  of  the  improve- 
ments thereon It  has  been  urged  that  the  taxation  of  improve- 
ments, like  the  taxation  of  personal  property,  would  be  a  penalization  of 
thrift  and  energy,  and  ought  to  be  abolished  in  a  community  whose  chief 
aims  are  progress  and  the  development  of  all  kinds  of  industry. 

Finally,  it  has  been  maintained  that  the  exemption  of  improvements 
from  taxation  would  more  especially  relieve  the  farmers  and  the  agricul- 
tural classes  generally,  who,  in  the  judgment  of  your  commissioners,  should 
be  especially  encouraged,  the  prosperity  of  no  other  class  being  so  essential 
to  the  best  interests  of  the  province  at  large. 

Largely  as  a  result  of  the  report  of  the  royal  commission  an 
amendment  to  the  tax  laws  of  the  province  was  enacted  under  which 
no  tax  will  be  imposed  on  buildings  and  improvements  on  lands  or 
on  personal  property  after  January  first  of  the  coming  year. 

Vancouver,  the  metropolis  of  British  Columbia,  was  the  first 
city  in  Canada  to  exempt  buildings  and  improvements  on  land 
from  taxation.  The  first  step  toward  exemption  was  taken  in  1895 
when  the  assessment  on  improvements  was  reduced  to  50  per  cent 
of  full  value.  This  was  followed  in  1906  by  an  additional  decrease 
of  25  per  cent,  and  in  19 10  entire  exemption  was  brought  about. 


888  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

The  result,  it  is  claimed  was  magical.  There  was  an  immediate  leap 
forward  in  local  prosperity,  huge  buildings  at  once  began  to  rise  up 
where  shacks  had  stood,  and  the  city  grew  in  population  by  leaps 
and  bounds.  Ten  years  ago  it  had  a  population  of  less  than  27,000; 
today  it  exceeds  150,000.  In  1901  the  assessed  value  of  land  was 
less  than  $23,000,000;  today  it  exceeds  $100,000,000.  That  the 
marvelous  growth  of  the  city  is  entirely  due  to  its  taxing  system  is 
not  claimed,  but  that  it  has  stimulated  and  aided  such  growth  is 
generally  admitted. 

In  Vancouver,  as  elsewhere,  some  criticism  of  the  principle  of 
exempting  buildings  is  heard  because  of  the  claim  that  as  buildings 
increase  in  size  and  number  there  is  a  corresponding  increase  in 
the  cost  of  police  and  fire  protection  and  other  public  service,  and 
that  it  is  unfair  to  require  the  land  to  bear  this  added  burden. 

In  answer,  it  is  contended  that  buildings  increased  the  value  of 
the  land — the  adjoining  vacant  lot  as  well  as  the  lot  on  which  the 
building  is  erected — and  that  therefore  the  added  burden  should 
justly  fall  on  the  land.  They  point  out  that  it  is  land,  not  build- 
ings, that  increases  in  value  in  a  growing  city;  that  police  and  fire 
protection  and  other  public  service  are  not  elements  of  value;  that 
such  service  neither  increases  nor  decreases  the  cost  of  building, 
and  therefore  in  justice  should  not  be  charged  to  the  building. 

Whatever  merit  there  may  be  in  either  contention,  it  is  but  fair 
to  add  that  a  large  majority  of  the  people  of  Vancouver  seem  to 
be  strong  advocates  and  supporters  of  the  principle  of  exempting 
buildings  and  improvements  from  taxation. 

GROWTH   OF   THE   SINGLE   TAX  PRINCIPLE   IN   WESTERN   CANADA 

The  most  striking  feature  in  a  study  of  tax  reform  in  western 
Canada  is  the  strong  trend  throughout  the  entire  country  in  the 
direction  of  the  single  tax  principle.  That  so  far  it  is  working  satis- 
factorily wherever  tried  is  generally  admitted,  even  by  opponents  of 
the  principle.  In  no  district  in  which  the  principle  has  been  applied 
is  there  any  noticeable  desire  to  return  to  the  old  system. 


PUBLIC  FINANCE  AND  TAXATION  889 

256.    THE  SINGLE-TAX  ARGUMENT' 

THE  ARGUMENT 

The  argument  in  the  case  may  be  put  briefly  as  follows: 
The  three  economic  legs  necessary  and  suflScient  whereupon  the 
single  tax  stool  may  firmly  stand  are  found  in  three  generic  peculiari- 
ties quite  exceptional  in  their  nature,  which  distinguish  land  from 
houses  or  other  man-made  products.  The  failure  to  recognize  this 
distinction  is,  we  believe,  sufficient  to  account  for  the  crookedness 
of  present  systems  of  taxation.  Such  a  recognition  must  lie  at  the 
very  foimdation  of  any  just  system  of  the  future. 

These  three  attributes,  firmly  grounded  in  orthodox  economics, 
are,  in  economic  language,  as  follows: 

a)  The  site  value  of  land  is  a  social  product. 

b)  A  land  tax  cannot  be  "shifted." 

c)  The  selling  value  of  land  is  an  untaxed  value. 

These  three  fvmdamentals  are  worthy  of  brief  separate  considera- 
tion. 

a)  First  in  order  is  the  fact  that  land  value  rs  a  social  product,  i.e., 
it  is  created  principally  by  the  community  through  its  activities, 
industries,  and  expenditures.  The  value  of  land  is  based  primarily 
upon  economic  rent,  defined  as  "what  land  is  worth  for  use,"  what  it 
would  command  in  the  open  market. 

Strictly  speaking  this  "worth  for  use"  usually  attaches  not  to  the 
land  itself,  not  to  the  earth's  surface,  not  to  the  inherent  capabilities 
of  the  soil,  not  to  light  and  air  or  other  bounties  of  nature  resident 
in  the  land,  but  to  scores  of  things  exterior  to  the  land  and  through 
it  made  available  for  use,  so  that,  as  applied  to  urban  land,  the  follow- 
ing would  be  a  more  accurate  definition: 

Groimd  rent  is  the  annual  value  of  the  exclusive  use  and  control 
of  a  given  area  of  land,  involving  the  enjoyment  of  those  "rights  and 
privileges  thereto  pertaining  "  which  are  stipulated  in  every  title  deed, 
and  which,  enumerated  specifically,  are  as  follows:  right  and  ease  of 
access  to  water,  health  inspection,  sewerage,  fire  protection,  police, 
schools,  libraries,  museums,  parks,  playgrounds,  steam  and  electric 
railway  service,  gas  and  electric  lighting,  telegraph  and  telephone 
service,  subways,  ferries,  churches,  public  schools,  private  schools, 

'  Adapted  from  C.  B.  Fillebrown,  "The  Single  Tax,"  in  State  and  Local  Taxation, 
Addresses  and  Proceedings  of  the  First  National  Conference  of  the  National  Tax 
Association  (1907),  pp.  287-91.     The  Macmillan  Co.,  1908. 


890  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

colleges,  universities,  public  buildings — utilities  which  depend  for 
their  efficiency  and  economy  on  the  character  of  the  government; 
which  collectively  constitute  the  economic  and  social  advantages  of 
the  land;  and  which  are  due  to  the  presence  and  activity  of  population, 
and  are  inseparable  therefrom,  including  the  benefit  of  proximity  to, 
and  command  of,  facilities  for  commerce  and  communication  with 
the  world — ^an  artificial  value  created  primarily  through  pubhc 
expenditure  of  taxes.  In  practice,  the  term  "land"  is  erroneously 
made  to  include  destructible  elements  which  require  constant  replenish- 
ment; but  these  form  no  part  of  this  economic  advantage  of  situation 
or  site  value. 

Consequently  ground  rent  may  be  said  to  result  from  at  least 
three  distinct  causes,  all  of  which  are  connected  with  aggregated  social, 
as  distinguished  from  individual,  activity:  (i)  public  expenditure; 
(2)  quasi-public  expenditure;  (3)  private  expenditure.  Thus  their 
very  nature  and  origin  would  seem  to  point  to  land  values  as  peculiarly 
fitted  to  bear  justly  the  burden  of  taxation. 

b)  Second  in  order  is  the  fundamental  fact  that  a  tax  upon  ground 
rent  cannot  be  shifted  upon  the  tenant  in  increased  rent.  The  argu- 
ment in  the  case  may  run  thus:  Ground  rent,  "what  land  is  worth 
for  use,"  is  determined  not  by  taxation,  but  by  demand.  Groimd 
rent  is  the  gross  income,  what  the  user  pays  for  the  use  of  land;  a 
tax  is  a  charge  upon  this  income,  similar  in  its  nature  to  the  incum- 
brance of  mortgage  interest.  It  is  a  matter  of  everyday  knowledge 
that  even  though  land  be  mortgaged  nearly  to  its  full  value,  no  owner 
would  think  to  rid  himself  of  the  mortgage  interest  that  he  has  to  pay 
through  raising  his  tenant's  rent  by  a  corresponding  amoimt.  Mort- 
gage interest  is  a  lien  upon  land  held  by  an  individual;  similarly,  a 
tax  may  be  conceived  most  clearly  as  a  lien  upon  land  held  by  the 
state.  Both  afi"ect  the  relations  between  owner  and  mortgagor,  and 
between  owner  and  state  respectively;  neither  has  any  bearing  upon 
the  relations  between  owner  and  tenant.  "Tax"  is  simply  the  name 
of  that  part  of  the  gross  ground  rent  which  is  taken  by  the  state  in 
taxation,  the  other  part  going  to  the  owner;  the  ratio  these  two  parts 
bear  to  one  another  has  no  effect  upon  the  gross  rent  figure,  which  is 
always  the  sum  of  these  two  parts,  viz.,  the  net  rent  plus  the  tax. 
The  greater  the  tax  the  smaller  the  net  rent  to  the  owner,  and  vice 
versa.  Ground  rent  is,  as  a  rule,  "all  that  the  traffic  will  bear"; 
that  is,  the  owner  gets  all  he  can  for  use  of  his  land,  whether  the  tax 
be  light  or  heavy.    Putting  more  tax  upon  land  will  not  make  it 


PUBLIC  FINANCE  AND  TAXATION  891 

worth  any  more  for  use.     If  the  market  value  of  a  lot  of  land  for 
use  is  $300  a  year,  a  tax  of  $100  will  not  make  it  worth  $400  a  year. 

These  two  propositions  (a)  that  land  value  is  a  social  product,  and 
(b)  that  a  tax  upon  land  cannot  be  shifted  by  the  owner  upon  his 
tenant  in  increased  rent,  are  well  settled  in  the  professional  mind. 

c)  Third  and  last  is  the  fact,  a  necessary  corollary  of  the  second, 
that  the  selling  value  of  land  is  an  untaxed  value,  a  proposition  that 
has  received  the  definite  approval  of  upwards  of  fifty  leading  Ameri- 
can teachers  of  economics  and  has  been  seriously  questioned  by  but 
two  or  three  of  the  three  hundred  to  whom  it  has  been  submitted. 

Every  purchaser  of  a  piece  of  property  knows,  without  argument, 
that  he  is  governed  as  to  the  price  he  will  pay,  not  by  the  gross  income, 
but  by  the  net  income  that  will  remain  to  him  after  all  charges  and 
incumbrances  by  way  of  mortgage  interest  or  tax  have  been  discharged. 

To  illustrate:  Assuming  a  piece  of  land  worth  $300  a  year  for 
use  to  be  free  of  all  charges  and  incumbrances,  and  assuming  the 
current  rate  of  interest  to  be  5  per  cent  per  annum,  a  purchaser 
would  buy  the  lot  for  $6,000,  because  interest  upon  that  sum  would 
amoimt  to  the  stipulated  $300  a  year.  But  assume  that,  on  the  con- 
trary, it  is  foimd  to  be  subject  to  a  mortgage  of  $2,000,  upon  which 
the  annual  interest  charge  is  $100;  then  he  will  buy  the  land,  not  at 
$6,000,  but  at  $4,000,  the  value  of  the  equity  remaining  after  mortgage 
interest  has  been  paid. 

But  assume  further  that  this  lot  of  land,  besides  being  subject 
to  a  mortgage  of  $2,000,  is  subject  also  to  an  established  tax  of  $100, 
which  charge  the  purchaser  must  also  assume.  He  will  then  purchase 
the  land  not  at  $4,000,  but  at  $2,000.  The  tax  charge  of  $100  and 
the  mortgage  interest  charge  of  $100  respectively  reduce  the  selling 
price  of  land  by  the  same  amount,  $2,000.  The  mortgage  and  the 
tax  together  therefore  reduce  it  by  $4,000;  and  the  purchaser  will 
buy  the  land  at  $2,000,  the  value  of  the  equity  that  remains  after 
both  mortgage  interest  and  tax  have  been  paid.  This  $2,000  is  the 
capitalization  of  the  annual  value  of  the  lot  after  all  charges  have 
been  met.  The  gross  value  is  the  taxed  value.  The  net  value  is  an 
untaxed  value. 

It  follows  from  the  above  too  brief  analysis  that,  under  the  present 
system,  the  selling  value  of  land  is  an  untaxed  value  and  the  land 
owners  who  invest  today  are  entirely  exempt  from  taxation. 

As  this  exemption  of  the  present  owner  holds  true  today,  so  it  will 
be  true  in  future  of  each  new  purchaser  subsequently  to  the  imposition 


892  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  any  new  tax.  It  is  in  the  very  nature  of  things  that  the  burden 
of  a  land  tax  cannot  be  made  to  survive  a  change  of  ownership. 

But  when  we  turn  to  the  case  of  the  taxation  of  houses  we  find  that 
no  parallel  appears.  Whereas  a  tax  upon  the  lot  could  not,  in  the 
nature  of  things,  increase  its  annual  rental,  or  cost  for  use,  a  similar 
tax  upon  the  house  is  added  directly  to  the  annual  cost  to  the  user. 
If  a  house  costing  $6,000  to  build  is  subject  to  a  tax  of  $100,  this 
amount  must  be  paid  annually  in  addition  to  an  interest  charge  of 
$300.  Increasing  or  decreasing  taxation  upon  the  lot  has  no  influence 
upon  its  annual  cost  to  the  user;  while  increasing  or  decreasing  the 
tax  upon  the  house  increases  or  decreases  in  exact  proportion  the 
annual  cost  to  the  user. 

The  moral  of  this  illustration  is  that  a  tenant  gets  for  use  annually 
$300  worth  of  land  for  $300,  and  a  house  costing  $300  for  $400.  In 
other  words,  a  house  tax  of  $100  takes  in  taxation  $100  a  year  of  the 
user's  income.  A  land  tax  of  $100  takes  in  taxation  no  part  of  the 
income  of  the  present  owner,  provided  that  he  purchased  the  land 
after  the  tax  was  imposed. 

The  beauty  of  this  illustration  is  that  while  land  stands  for  every- 
thing except  the  products  of  labor,  a  house  is  here  made  to  stand  as 
the  representative  of  any  and  all  products  of  individual  labor,  and 
the  illustration  thus  becomes  all  inclusive. 

The  practical  exemption  of  the  selling  value  of  land  is  vital  in  its 
bearing  upon  any  proposition  for  obtaining  an  increased  revenue 
from  that  source,  accompanied  by  a  corresponding  exemption  of 
other  property. 

In  the  light  of  the  foregoing  argument  it  is  interesting  to  consider 
what  one  city,  the  city  of  Boston,  might  have  done  to  promote  busi- 
ness and  secure  equity  through  a  sound  and  just  system  of  taxation. 

The  following  estimate  indicates  the  gigantic  proportions  of  the 
factor  ground  rent,  and  its  sufficiency  to  meet  all  reasonable  costs  of 
government  economically  administered,  not  only  without  impx)verish- 
ing  the  land  owner,  but  without  subjecting  him  at  any  time  to  a  tax 
more  burdensome  or  more  continuous  than  that  borne  by  every 
man  that  has  lived  in  a  house  since  a  house  tax  was  invented. 


PUBLIC  FINANCE  AND  TAXATION  893 

The  gross  ground  rent  of  the  land  of  the  city  of  Boston  is  by 

careful  estimate  more  than $50,000,000 

Of  this  amount  there  is  already  taken  in  taxation 10,000,000 


Leaving  to  the  land  owners  of  today  a  net  ground  rent  of ... .     $40,000,000 

The  fact  that  this  sum  amounts  to  $68  per  capita,  or  $340 
per  family,  will  help  the  mind  to  grasp  its  magnitude  as  a 
factor  in  the  distribution  of  wealth. 

State  and  local  taxes  upon  improvements,  buildings,  personal 
property,  and  polls  amount  to  something  over 11,000,000 

If  this  additional  amount  were  taken  from  rent  there  would 

still  remain  to  the  land  owners  a  balance  of $29,000,000 

or  $48  per  capita,  or  $240  per  family. 

Coming  to  the  consideration  of  the  means  by  which  more  revenue 
may  be  gradually  raised  from  the  land  and  the  burden  of  taxation 
made  more  proportionate  and  reasonable,  choice  may  be  had  from  a 
variety  of  methods.  The  one  most  frequently  suggested  is  that  of 
appropriating  by  taxation  part  or  all  of  the  future  increase  in  land 
values.  If  Boston  should  decide  to  start  today  and  take  in  taxation 
her  future  unearned  increment  above  the  present  value  of  $653,000,000 
the  case  would  be  exactly  the  same  as  that  of  some  new  community 
where  no  value  has  accrued,  a  situation  in  which  the  ideal  justice 
of  the  single  tax  is  so  frequently  conceded. 

If  Boston  had  decided  ten  years  ago  upon  the  large  annual  increase 
of  one  dollar  per  thousand  each  year  for  ten  years  in  the  rate  of 
taxation  upon  its  land,  coupled  with  similar  reduction  in  rate  upon 
buildings  and  personal  property,  that  city  would  be  raising  today 
from  its  land  $10  per  thousand  more  than  it  does  now,  or. 

Land  $653,000,000,  at  $10,  an  increase  of  more  than $6,000,000 

The  increase  in  land  value  in  the  same  ten  years  was 
$188,000,000,  5  per  cent  of  which  is  over $9,000,000 

And  Boston  would  be  taking  in  increased  taxation  today  only 
two-thirds  of  its  land  increment  for  the  same  ten  years. 

Under  this  supposition  the  $468,000,000  valuation  of  ten  years 
ago  would  still  remain  untouched  by  taxation,  as  is  now  the  case 
with  substantially  the  whole  $653,000,000  valuation  of  1907. 

The  foregoing  Boston  figures  are  submitted  simply  for  purposes 
of  illustration,  not  in  any  way  as  support  of  a  specific  recommenda- 
tion. 


894  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

If  the  preceding  argument  is  valid,  it  establishes  the  fact  of  gross 
inequality  in  the  incidence  of  taxation  as  between  land  values  and 
improvement  values.  If  it  is  admittedly  wrong  that  present  land 
values  should  be  untaxed,  how  can  such  fiscal  wrong  best  be  righted  ? 
Begin  at  once  a  transfer  of  taxes  from  improvements  to  land  so 
gradual  that  two  old  injustices  will  cease  for  every  new  one  that  is 
begun,  until  this  untaxed  value  is  made  to  bear  at  least  its  propor- 
tionate burden  at  the  same  rate  with  other  things. 

In  conclusion  I  wish  to  emphasize  this  basic  fact :  that  the  burden 
of  a  land  tax  cannot  be  made  to  survive  a  change  of  ownership  has 
in  turn  this  corollary  of  its  own,  viz.,  that  a  new  tax  burden  if  imposed 
today  would  in  one  generation,  by  sale  or  by  inheritance,  cease  to  be  a 
burden.  If  all  taxes  are  finally  collected  from  the  land  owner,  he 
will  then  be  the  only  man  taxed.  If  another  generation  serves  to 
let  his  successor  out  from  under  the  burden,  who  will  remain  under  it  ? 
Ground  rent,  economic  rent,  being  an  equivalent  for  value  received, 
is  not  a  burden,  and  if  all  taxes  are  ultimately  taken  from  rent,  it 
follows  that  in  the  course  of  two  or  three  generations  taxation  may 
cease  entirely  from  being  a  burden  upon  anyone. 

If  professional  economists  and  taxation  experts  will  at  once,  to 
use  a  nautical  phrase,  quit  their  dead  reckoning,  and  steer  their  craft 
by  the  single-tax  polestar,  time  and  tide  will  do  the  rest. 


257.    THE  LAND-VALUE  TAX  AS  A  SOCIAL  REFORM' 

The  single  tax  is  least  of  all  a  taxing  measure.  This  is  but  inci- 
dental, though  essential,  to  a  larger  social  ideal;  an  ideal  as  far- 
reaching  in  its  consequences  as  Socialism,  but  far  simpler  in  its 
application.  Its  benefits  depend  on  no  revolution,  but  are  realized 
as  fast  as  the  tax  is  applied.  And  it  is  of  the  Land- Value  Tax  as  a 
social  philosophy  that  we  ask  your  criticism  and  suggestion. 

TAXATION   OF   LAND   VALUES   WILL — 

First,  put  an  end  to  idle  land  holding. — It  will  destroy  speculation. 
It  will  make  it  impossible  to  hold  land  out  of  use.  As  the  British- 
Chancellor  of  the  Exchequer  said:  "It  will  make  the  dog  in  the 
manger  pay  for  his  manger."  The  owner  will  have  to  use  his 
land,  and  use  it  in  the  most  productive  way,  in  order  to  pay  the  taxes. 

»  From  The  Taxation  of  Land  Values,  a  pamphlet  issued  by  the  Joseph  Fels 
Fund  Commission. 


PUBLIC  FINANCE  AND  TAXATION  895 

That  increasing  land-value  taxes  check  speculation  and  stimulate 
use  is  a  commonplace  of  experience. 

Second,  cheapen  land. — First.  Many  owners  will  sell  their  imused 
land  in  order  to  be  relieved  of  the  burden  of  taxation. 

Second.  The  taxation  of  rent  will  lessen  the  value  of  land,  for 
economists  agree  that  the  selling  value  of  land  is  its  untaxed  value. 
For  taxes  levied  on  land  values  reduce  rent.  They  fall  on  the  land- 
lord and  cannot  be  shifted.  Economic  rent  is  what  is  left  after  the 
payment  of  taxes.  Thus,  the  competition  of  sellers  and  the  reduc- 
tion of  rent  will  cheapen  land  and  throw  upon  the  market  idle  holdings 
that  will  be  available  for  industry,  agriculture,  and  home-building. 

Third,  solve  the  housing  problem. — ^The  housing  question  is  a  land 
question,  not  a  house  question.  It  exists  only  where  land  values  are 
prohibitive.  If  we  cheapen  land  we  open  it  up  to  use;  if  we  tax  it 
heavily  enough  we  compel  it  to  be  built  upon.  Idle  land  holding  is 
only  possible  where  the  tax  rate  is  low.  Increase  the  rate  and  the 
land  is  put  to  productive  use.  Moreover  the  removal  of  taxes  on 
improvements  will  encourage  improvements  just  as  the  present 
taxation  of  improvements  discourages  them.  Under  the  land-value 
tax  he  who  built  would  be  rewarded,  while  he  who  refused  to  do  so 
would  be  fined.  The  house  tax  is  like  the  old  French  window  tax, 
which  caused  the  peasant  to  close  his  cottage  to  the  sunlight. 

The  taxation  of  land  values  would  cut  Uke  a  surgeon's  knife  at  the 
root  of  city  land  monopoly.  Shacks  and  tenements  would  be  im- 
proved, while  new  structures  would  increase  the  housing  capacity  of 
the  city.  The  tenement  and  the  slum  would  disappear.  No  longer 
would  thrift  be  penalized  and  the  idle  speculator  be  rewarded. 

Rents  would  fall  in  consequence  of  the  increased  supply  of  houses. 
Building  materials  in  transition  from  the  mine,  the  forest,  and  the 
factory  would  be  free  from  taxes,  as  would  houses,  office  buildings, 
machinery,  and  factories.  All  of  these  forces  together  would  solve 
the  housing  question  in  a  few  years'  time.  They  would  solve  it  by 
the  law  of  competition. 

Fourth,  destroy  all  monopolies  bottomed  on  land. — ^The  United  States 
Steel  Corporation  has  capitalized  its  iron  ore  and  coal  fields  at  $800,- 
000,000,  Twenty-five  years  ago  they  were  farming  lands  of  little 
value.  The  anthracite  coal  combination  is  capitalized  at  hxmdreds 
of  millions  by  virtue  of  its  ownership  of  all  the  anthracite  coal  in  the 
East.  The  Standard  Oil  Company  is  a  monopoly  because  of  its 
railway  and  land  privileges.    Direct  land-value  taxes  upon  these 


896  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

resources  could  not  be  shifted.  jThey  would  be  deducted  from 
monopoly  profits.  More  than  this,  idle  mineral  resources  would  be 
forced  into  use,  while  labor  would  be  given  new  opportunities  for 
employment.  With  the  tax  sufficiently  high,  the  nation  would  regain 
the  splendid  resources  that  have  been  in  large  measure  filched  from 
it  by  stealth  and  illegal  means.  The  rent,  which  now  goes  to 
monopoly,  would  be  converted  in  taxes  to  the  state. 

Fifth,  improve  the  condition  of  capital  and  labor. — What  would 
labor  gain  in  the  new  dispensation  ?  Obviously,  cheap  land  means 
high  wages.  The  history  of  all  new  coimtries  proves  this.  And  if 
the  city,  suburban,  and  agricultural  land  owners  were  taxed  on  the 
opportunities  held  out  of  use,  they  would  use  their  land  or  sell  it.  A 
demand  for  labor  would  arise:  a  demand  for  miners  and  agricultural 
workers,  for  masons,  carpenters,  and  builders.  All  other  industries 
would  be  awakened  into  life  in  the  process.  All  business  would  be 
stimulated.  In  a  short  time — a  very  short  time — there  would  be  more 
jobs  than  men  seeking  them.  Now,  the  entire  continent  is  appro- 
priated, yet  it  peoples  but  twenty-three  persons  to  the  square  mile. 
America  could  home  ten  times  its  present  population  were  the  natural 
resources  opened  to  use.  This  the  taxation  of  land  values  would  do. 
It  would  increase  opportunity,  as  did  the  discovery  of  the  continent 
four  hundred  years  ago. 

Sixth,  efect  a  just  distribution  of  wealth. — Even  a  slight  increase  in 
land-value  taxes  would  stimulate  the  use  of  land.  A  doubling  of  the 
present  rate  would  usher  in  an  era  of  industrial  prosperity.  Were  the 
tax  increased  to  the  full  rental  value,  there  would  be  but  two  claim- 
ants to  the  wealth  produced — capital  and  labor.  The  landlord  would 
disappear  and  labor  and  capital  would  each  get  the  full  value  of  its 
product.  There  would  be  plenty  of  alternatives  for  employment 
in  this  country.  Wages  would  rise  to  the  full  product  of  men's  toil. 
The  opening  up  of  new  opportunities  all  about  us,  and  the  increase  in 
wages  would  awaken  other  industry.  It  would  flood  mills,  factories, 
mines,  and  railways  with  business:  for  the  wants  of  mankind  know 
no  limit. 

Industry  would  reflect  the  changed  conditions.  For  prosperity 
means  increased  demands  for  all  those  goods  which  labor  and  capital 
produce.  Were  the  incomes  of  the  salaried,  professional,  and  working 
classes  doubled  tomorrow  there  would  arise  an  era  of  prosperity  the 
like  of  which  the  world  has  never  known.  For  the  purchasing  power 
of  America  would  be  doubled  in  consequence.     And  in  the  last  analysis 


PUBLIC  FINANCE  AND  TAXATION  897 

prosperity  depends  not  on  the  cheapness  of  labor  but  on  the  amount 
of  money  which  the  consuming  classes  have  to  spend.  Industrial 
prosperity  depends  on  the  well-being  of  the  great  mass  of  the  people 
rather  than  of  the  few.  Through  the  same  influences  child  labor 
would  disappear,  vagrancy  would  be  reduced  to  a  minimum,  and 
crime  would  be  checked  at  its  source.  For  child  labor,  vagrancy, 
and  crime  are  not  to  be  found  among  those  who  are  well-to-do. 
They  are  the  costs  of  poverty. 

Seventh,  reduce  the  cost  of  living  despite  increased  wages. — The 
federal  revenues,  amoimting  to  $700,000,000  a  year,  are  collected  from 
consiuners.  They  increase  the  cost  of  living.  It  has  been  estimated 
by  Professor  William  G.  Sumner  of  Yale  and  John  A.  Hobson  of 
England,  that  the  indirect  cost  of  the  tariff,  due  to  the  monopoly 
prices  it  makes  possible,  is  approximately  a  billion  and  a  half  dollars  a 
year.  This  is  equivalent  to  $100  a  family.  The  abolition  of  indirect 
taxes  alone  would  reduce  the  cost  of  living  to  that  extent,  while  the 
abolition  of  the  taxes  now  levied  on  houses,  improvements,  tools, 
machinery,  and  all  other  labor  products  would  reduce  it  still  further. 

LAND-VALUE  TAXATION  IS   A   SOCIAL  PHILOSOPHY 

Land-value  taxation  would  socialize  from  fifty  to  seventy-five 
per  cent  of  the  wealth  of  America.  It  would  require  no  new  machinery 
to  do  this;  no  state  control  of  industry  would  be  necessary.  It  would 
open  up  the  resources  of  America  to  those  best  fitted  and  having  a 
natural  right  to  use  them.  It  would  eliminate  the  speculator  and  the 
land  monopolist  as  toll-takers  in  distribution.  It  would  destroy 
private  monopoly.  It  would  create  opportunities  for  tens  of  millions 
of  workers,  and  would  stimulate  the  production  of  wealth  beyond 
our  present  dreams.  It  would  equitably  distribute  the  wealth  pro- 
duced and  would  increase  many  fold  the  amount  available  for  distri- 
bution. We  believe  it  would  bring  about  the  rapid  evolution  of  a 
society  in  which  want  and  the  fear  of  want,  poverty  and  its  attendant 
evils  of  vice,  disease,  and  crime  would  disappear. 


XX.    SOME  PROGRAMS  OF  SOCIAL  REFORM 

258.    PROFIT-SHARING  IN  THE  N.  O.  NELSON 
MANUFACTURING   CO.' 

The  N.  O.  Nelson  Manufacturing  Co.  of  St.  Louis  adopted  profit- 
sharing  beginning  with  1886,  when  it  put  in  the  pay  envelopes  a 
5-line  notice  that  after  the  commercial  rate  of  interest  had  been  paid 
on  the  net  capital  the  remaining  profit  would  be  divided  by  equal 
percentages  on  the  stock  and  on  the  salary  and  wages  of  all  who  had 
worked  six  months  within  the  year.  The  result  was  a  dividend  of 
S  per  cent  on  wages,  which  was  paid  in  cash.  The  next  year  yielded 
10  per  cent,  which  was  also  paid  in  cash.  The  announcement  was 
then  made  that  in  the  future  the  dividends  would  be  paid  in  stock. 
Following  the  panic  of  1893,  dividends  on  stock  and  on  wages  were 
suspended  until  1904,  at  which  time  a  dividend  of  4  per  cent  was 
paid  for  each  of  the  years  of  this  suspension.  It  was  then  announced 
that  capital  would  be  allowed  6  per  cent,  but  no  further  share  in  the 
profits,  and  that  the  customers  would  also  be  taken  into  the  arrange- 
ment, thus  making  it  completely  co-operative.  The  customers' 
dividend  is  figured,  not  on  the  purchases,  but  on  the  gross  profits. 
In  the  years  from  1904  to  1912,  inclusive,  the  dividends  have  ranged 
from  10  to  20  per  cent  on  salaries  and  wages,  and  from  15  to  45  per 
cent  on  the  gross  profits  of  customers'  purchases.  Employees  and 
customers  together  now  own  about  two-thirds  of  the  capital  which, 
including  the  surplus,  amounts  to  about  $1,750,000.  The  directors, 
except  Mr.  Nelson  himself,  are  all  employees  of  various  kinds,  and 
at  times  the  customers  are  represented  on  the  Board.  There  are  now 
about  1,200  employees,  of  whom  approximately  three-quarters  are 
factory  workers  in  St.  Louis,  Mo.,  Leclaire,  111.,  Bessemer,  Ala.,  and 
Noblesville,  Ind.  The  remainder  are  business  employees  at  these 
places  or  at  branch  houses  in  Memphis,  Tenn.,  Houston,  Tex.,  Los 
Angeles  and  San  Diego,  Cal.,  Salt  Lake  City,  Utah,  and  I^ueblo,  Colo. 

In  1890  the  company  founded  the  town  of  Leclaire,  111.,  18  miles 
northeast  from  St.  Louis.  There  it  built  its  principal  factories,  and 
houses  for  employees  who  wanted  them,  and  provided  desirable 
public  facilities.    Leclaire  now  has  a  population  of  about  1,000,  has 

'  Information  communicated  by  Mr.  N.  0.  Nelson. 

898 


SOME  PROGRAMS  OF  SOCIAL  REFORM  899 

no  poUtical  organization,  no  jail  or  policemen  or  other  officers,  and 
has  never  had  need  of  any.  It  has  a  public  water  supply,  electric 
light,  a  public  hall,  baseball  grounds,  a  bowling  alley,  a  billiard 
room,  and  a  7-acre  artificial  lake  for  boating,  skating,  and  swimming. 
The  lots  are  sold  to  anybody,  whether  employee  or  not.  The  houses 
are  built  according  to  agreed  plans  on  monthly  instalments,  the  com- 
pany having  only  two  or  three  renting  houses.  The  houses  are 
mostly  of  3  to  6  rooms,  built  on  lots  of  from  50  to  100  feet  front,  by 
about  160  feet  in  depth.  They  are  subject  to  no  rules  whatever, 
but  are  all  well  kept,  and  some  are  as  handsomely  landscaped  as 
those  of  rich  people  elsewhere.  Mr.  Nelson  has  made  his  own  home 
in  Leclaire  since  1897. 

The  profit-sharing  as  well  as  the  town-making  have  been  eminently 
satisfactory.  No  one  has  thought  of  changing  the  system.  Mr. 
Nelson  is  convinced  that  with  ordinary  common-sense,  provision  for 
steady  work  and  owned  homes,  and  with  provision  for  social  life, 
there  is  no  need  of  policemen,  jails,  or  poorhouses,  and  almost  none 
for  doctors,  lawyers,  or  courts.  The  employees  and  neighbors  have 
a  co-operative  store  conducted  on  the  Rochdale  plan  from  which  they 
buy  at  the  usual  prices,  get  6  per  cent  interest  on  their  investment, 
and  have  a  regular  dividend  or  rebate  of  10  per  cent  on  purchases, 

259.    PROFIT-SHARING  AND  LABOR  COPARTNERSHIP^ 

The  scheme  of  my  own  firm,  J.,  T.  &  J.  Taylor  Ltd.,  woolen  manu- 
facturers, Batley,  based,  like  others,  on  the  theory  that  profit  is  the 
joint  product  of  capital  and  labor,  is  as  follows:  The  first  claim  of 
labor  (in  which  I  include  all  forms  of  human  exertion)  is  met  during 
the  year  by  the  payment  of  salaries  and  wages.  Next  comes  the 
first  claim  of  capital  to  5  per  cent  interest  as  a  first  charge  upon  any 
profits  shown  in  the  balance-sheet  at  the  end  of  each  year.  If  there 
are  not  profits  capital  gets  nothing.  If,  after  paying  5  per  cent 
interest  on  all  shares  (the  majority  of  which  are  now  owned  by  our 
employees),  a  divisible  balance  remains,  it  is  apportioned  between 
capital  and  the  total  amount  paid  during  the  year  for  labor  according 
to  their  respective  amounts,  that  is,  at  the  same  rate  per  cent.  To 
employees  who  are  not  less  than  twenty-one  years  of  age,  who  have 
been  five  years  in  our  employ,  and  have  retained  their  bonus  shares 

"From  Theodore  Cooke  Taylor,  "Profit-Sharing  and  Labor  Copartnership,'' 
in  The  Contemporary  Review,  CI,  630-31  (May,  191 2). 


900  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

to  the  amount  of  half  their  yearly  wages,  we  are  now  giving  double 
bonus.  The  total  amount  of  such  wages,  therefore,  has  to  be  reckoned 
double.    Let  me  illustrate. 

Suppose  our  capital  were  £160,000,  that  during  the  year  we 
had  paid  in  salaries,  and  wages  £90,000,  and  that  workers  who  had 
earned  one-third  of  that  were  entitled  to  double  bonus.  We  should 
add  £30,000  to  the  £90,000  actually  paid,  thus  making  a  total  labor 
item  of  £120,000.  Suppose  our  divisible  profits  were  £29,000:  we 
should  first  declare  an  interest  dividend  of  5  per  cent  (that  is  £8,000) 
on  the  capital,  leaving  £21,000  to  be  further  divided  between  capital 
and  wages  at  7^  per  cent.  Thus  capital,  or  shares,  would  get  a  total 
aividend  (including  interest)  of  12^  per  cent  and  labor  a  bonus  of 
7^  per  cent.  The  workers  specially  qualified,  who  earned  one-third 
of  the  £90,000  actually  paid  in  wages,  would  get  double  bonus,  that 
is,  at  the  rate  of  1 5  per  cent,  while  the  bonus  on  the  remaining  £60,000 
wages  paid  would  be  at  the  rate  of  75  per  cent.  (These  labor  bonuses 
have,  so  far,  been  given  in  new  fully-paid  shares  of  the  company, 
dividends  upon  which  are  paid  in  cash.)  But  as  only  those  who 
remain  the  whole  year  are  entitled  to  bonus,  we  place  the  bonus 
accruing  upon  the  wages  of  those  with  us  only  parts  of  the  year  to 
a  special  fund  called  the  Workers'  Benefit  Fund,  administered  in 
various  ways  for  the  benefit  of  the  workers  as  a  whole.  For  example, 
needy  cases  are  helped,  convalescent  and  consumptive  cases  assisted, 
and  benefits  extended  to  our  mutual  sick-club  members.  Bonus 
shares  confer  all  financial  rights,  but  do  not  carry  votes.  They  can 
be  held  only  by  employees,  and  so  long  as  a  man  remains  in  the 
company's  employ  he  can  sell  only  the  surplus  of  his  holding  over 
the  amount  of  his  annual  salary  or  wages.  Copartners  who  leave 
must  sell  their  shares  to  some  of  their  copartners  remaining.  Com- 
menced in  1892,  the  system,  the  first  three  years,  applied  to  managers 
and  foremen  only.  For  the  last  seventeen  years  all  have  been  included 
who  have  completed  a  calendar  year  with  the  company.  The  divi- 
dends have  averaged  about  10^  per  cent  on  capital  and  7  per  cent  on 
labor.  There  is  nothing  down  in  our  balance-sheet  for  good-will, 
and  there  is  no  inflation  in  valuations.  On  the  usual  company  basis 
the  capital  would  have  figured  as  larger;  the  same  totals  of  profits, 
therefore,  would  have  yielded  lower  rates  of  dividend  on  both  capital 
and  labor. 

It  is  often  asked:  What  about  losses?  I  can  speak  from  expe- 
rience.    In  1897  and  1898  we  had  no  dividend,  and  I  have  yet  to 


SOME  PROGRAMS  OF  SOCIAL  REFORM  goi 

hear  the  first  word  of  reproach  or  mistrust  from  any  one  of  my  co- 
partners. Ours  is  an  old-established,  but  highly  technical,  business, 
difficult  to  manage.  In  twenty  years  the  number  of  our  workers  has 
increased  from  600  to  1,400,  and  we  have  apportioned  as  the  workers' 
share  near  £100,000.  The  system  has,  during  that  time,  been  a 
benefit  to  all  concerned. 


260.    A  PROMISING  VENTURE  IN  INDUSTRIAL  PARTNERSHIP' 

At  some  point  in  the  scale  of  remuneration  of  every  large  com- 
pany occurs  a  natural  division  of  the  workers  into  two  groups.  Below 
the  point  are  those  workers  whose  labor  is  mainly  of  a  routine  charac- 
ter. By  special  care  or  effort  they  can  save  from  their  own  time  or  ■ 
energy  or  material.  They  can  turn  out  the  same  product  in  fewer 
hours,  or  with  less  effort,  or  with  less  waste  of  materials  or  power. 
The  problem  of  their  remuneration  is  essentially  one  of  paying  wages 
in  proportion  to  output,  and  that  problem  is  perhaps  best  met  at 
present  by  some  safeguarded  variety  of  piece  wage. 

Above  this  group  are  those  workmen  who  can  exercise  imagina- 
tion, often  enough  men  promoted  for  their  fitness  from  the  lower 
group.  They  have  initiative,  they  originate.  They  are  men  who 
can  think  calmly  and  clearly  of  two  things  at  once.  They  can,  by 
mechanical  rearrangement,  secure  real  economies,  economies  inde- 
pendent of  extra  strain  by  workmen.  They  can  exercise  discretion 
in  bu3dng  materials  or  selling  finished  product,  and,  by  their  under- 
standing of  a  complicated  situation,  may  exercise  their  discretion 
wisely  and  profitably.  For  their  success  they  are  further  promoted 
in  position  or  salary.  From  the  most  successful  of  them  the  higher 
officers  and  the  directors  of  the  company  are  naturally  chosen.  Since 
increased  profits  of  the  company  are  so  intimately  dependent  on  the 
energies  of  the  entire  active  managing  body,  and  not  on  stockholders 
who  send  proxies  or  have  an  otherwise  external  relation,  should  not 
the  entire  increase  of  profits  of  the  company  go  to  these  men  ?  That 
they  should,  and  that  thereby  the  finest  morale  of  the  company  may 
be  preserved  and  indefinitely  continued,  has  been  the  belief  of  the 
reincorporators  of  the  Dennison  Company. 

The  stockholders  of  the  old  company  became  under  the  new 

•  From  Robert  F.  Foerster,  "A  Promising  Venture  in  Industrial  Partnership," 
in  the  Annals  of  the  American  Academy  of  Political  and  Social  Science,  XLIV,  97- 
103  (November,  191 2). 


0O2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

the  owners  of  first  preferred  stock  to  the  amount  of  $4,500,000,  on 
which  a  cumulative  dividend  at  the  rate  of  8  per  cent  is  due.  Pro- 
vision is  made  for  the  issue  of  second  preferred  stock  in  series,  each 
series  having  an  unchangeable  rate  of  dividend  not  less  than  4  per 
cent.  The  circumstances  of  the  issue  of  this  stock  are  stated  below. 
After  dividends  on  the  first  and  second  preferred  stocks  have  been 
paid,  there  will  be  deducted  annually  from  the  remaining  net  profits 
5  per  cent  of  the  remainder  for  the  purjoose  of  buying  in  shares  of 
first  preferred  stock  upon  favorable  occasion. 

An  issue  of  industrial  partnership  stock  to  the  amount  of  $1,050,- 
000  is  authorized.  Such  stock  may  be  owned  only  by  so-called 
principal  employees,  the  group  already  described.  They  are  persons 
who  in  the  previous  year  have  received  for  their  labors  (a)  $1,200 
or  over  and  been  seven  years  in  service;  (b)  $1,500  and  six  years  in 
service;  (c)  $1,800  and  five  years.  Such  principal  employees  receive 
shares  of  industrial  partnership  stock  in  a  number  proportional  to 
their  wages.  Stock  shall  not  be  issued  for  cash,  but  shall  represent 
profits  of  the  company,  and  therefore  be  distributed  without  special 
charge  to  those  whose  peculiar  efforts  are  chiefly,  in  the  long  run, 
the  means  of  securing  the  profits.  But  no  new  issue  or  industrial 
partnership  stock  shall  take  place  until  a  5  per  cent  cash  dividend 
has  been  paid  on  the  outstanding  industrial  partnership  stock.  To 
insure  the  frequent,  probably  annual,  issue  of  such  stock,  no  cash 
dividend  upon  it  shall  ever  exceed  20  per  cent  in  one  year. 

A  crucial  question  in  this  connection  is,  how  shall  the  issues  of 
industrial  partnership  stock  be  apportioned  ?  Certainly  by  no  human 
device  can  the  final  profits  of  a  complex  business  be  perfectly  ascribed 
to  individual  workmen  composing  the  business.  Yet  a  working 
approximation  seems  not  impossible.  In  the  salaries  that  men  get 
there  is  a  kind  of  index  to  their  comparative  values  to  the  business; 
no  perfect  index  again,  yet  one  that  results  from  the  best  available 
discernment.  Let  him  whose  salary  is  twice  that  of  another,  receive 
twice  the  other's  allotment  of  stock.  Industrial  partnership  stock 
is  issued  in  $10  denominations,  so  that  many  gradations  of  amount 
may  be  adequately  expressed. 

Where  ordinary  remuneration  is  the  basis  of  issues  of  new  stock, 
there  appears  an  incentive  for  each  man  to  make  himself  worth  more 
in  the  daily  execution  of  his  tasks  and  so  to  qualify  himself  for  another 
position  which  would  bring  not  only  higher  salary,  but,  correspc«<J- 
ingly,  a  more  liberal  allotment  of  stock. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  903 

Only  active  workmen  still  in  service  may  be  holders  of  industrial 
partnership  stock.  That  is  partly  because  of  arrangements  as  to 
voting,  presently  to  be  described,  but  chiefly  in  order  that  future 
increments  of  profit  may  be  divided  only  among  those  who  may  be 
regarded  as  responsible  for  them.  Hence  in  case  an  employee  leaves 
the  company  or  dies,  his  stock  may  either  be  purchased  by  the  com- 
pany for  cash  or  converted  by  the  company  into  second  preferred 
stock  paying  an  unvarying  rate  of  dividend  and  never  receiving  an 
allotment  of  new  stock.  So  the  retiring  employee  may  receive  and,  as 
the  case  may  be,  may  bequeath  to  others  a  capital  amount  represent- 
ing his  saved  earnings,  but  he  may  not  transmit  a  claim  to  increased 
future  profits  which  he  and  his  descendants  have  not  helped  to  create. 
At  the  option  of  the  company  cash  may  be  paid,  instead  of  second 
preferred  stock,  to  the  retiring  owner  of  industrial  partnership  stock. 

What  this  arrangement  implies  when  read  in  the  light  of  the 
position  and  destiny  of  the  preferred  stocks  is  the  most  interesting 
part  of  the  Dennison  scheme.  In  all  probability  a  considerable 
amount  of  industrial  partnership  stock  will  be  issued,  but  it  may  be 
some  years  before  $1,000,000  will  be  outstanding.  Until  that  date 
arrives,  stockholders  of  all  classes  will  vote  according  to  the  capital 
value  of  their  shares,  the  holder  of  one  share  of  first  preferred  stock, 
par  $100,  and  the  holder  of  ten  shares  of  industrial  partnership 
stock,  par  $10,  will  each  have  in  so  far  one  vote.  The  larger  the 
amount  of  industrial  partnership  stock,  the  safer  will  be  the  return 
on  the  preferred  stocks.  When  $1,000,000  of  industrial  partnership 
stock  is  outstanding,  the  preferred  stocks  will  have  sufficient  safety 
no  longer  to  require  a  vote.  Then  their  holders  will  cease  to  vote 
and  the  entire  management  of  the  concern  will  fall  to  the  principal 
employees.  These  are  the  persons  most  fit  to  manage,  the  persons 
who  have  risen  from  the  lower  places,  the  persons  qualified  by  proved 
ability  and  experience  to  manage  the  business.  Hitherto  they  have 
been  merely  employees,  and  though  performing  some  of  the  functions 
of  managers,  have  not  had  corresponding  authority  and  privileges  in 
the  conduct  of  the  business.  Henceforth,  as  part  owners  of  the  busi- 
ness, with  an  income,  above  wages,  that  is  large  or  small  according 
to  the  character  of  their  management,  they  will  have  enough  at  stake 
to  be  trusted  as  sole  managers.  Should  they  fail  in  their  task,  reduc- 
ing, and  then  maintaining  for  some  time,  the  dividends  of  the  pre- 
fe-.'ied  stocks  below  the  stipulated  rates,  then  the  preferred  stock- 
holders may  resume  the  management,  to  retain  it  until  the  rates 


904  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

arc  restored.  But  for  iui  extended  period  of  inability  to  pay  preferred 
dividends,  such  a  period  as  proves  that  the  assets  behind  the  indus- 
trial partnership  stock  have  disappeared,  the  first  preferred  stock- 
holders shall  take  over  and  permanently  retain  the  voting  power. 

Such  collapse  seems  unlikely.  Provisions  for  redeeming  in 
cash  the  stock  of  persons  leaving  the  business,  and  for  buying  in 
shares  of  the  first  preferred  stock,  should  prevent  the  burden  of  fixed 
dividend  charges  from  becoming  excessive.  Also,  the  checks  upon 
the  dividend  rate  of  the  industrial  partnership  stock  should  lead  to  a 
large  increase  in  the  outstanding  amount  of  this  more  variable  secur- 
ity. Having  lost  their  vote,  the  preferred  stockholders  would  become 
akin  to  bond  creditors.  The  business  would  more  and  more  approach 
the  form  of  a  pure  industrial  partnership. 

261.    THE  ROCHDALE  PLAN  OF  CO-OPERATION* 

Modern  co-operation  is  essentially  democratic — a  people's  move- 
ment far  more  truly  than  either  trade  unionism,  agrarianism,  or  even 
socialism  in  its  prevalent  orthodox  form,  can  be.  Its  effective 
practice  dates  from  the  adoption  of  a  specific  business  and  social 
policy  drawn  up  in  1844  by  a  group  of  28  flannel  weavers  in  Rochdale, 
England.  The  business  principles  of  this  association  require  detailed 
mention  since,  directly  and  indirectly,  they  have  served  quite  largely 
as  model  for  successful  co-operative  societies  of  every  sort  throughout 
the  world. 

The  Rochdale  principles  were: 

1.  Open  membership  with  shares  of  low  denomination — usually  at 
£1  or  $5  each  and  payable  by  instalments,  so  as  to  be  within  the 
reach  of  all.  , 

2.  Limitation  of  the  amount  of  shares  to  be  held  by  any  one  member, 
to  prevent  wide  inequality  in  financial  status  of  members. 

3.  Democratic  government,  each  member  to  have  but  one  vote, 
irrespective  of  the  number  of  shares  that  he  or  she  may  hold. 

4.  Sale  of  pure  goods  and  fair  measure  at  prevailing  market  price, 
to  avoid  arousing  needlessly  the  destructive  hostility  of  local 
merchants. 

5.  Cash  sales,  to  avoid  loss  through  delayed  payments  and  uncol- 
lectuble  accounts,  to  reduce  bookkeeping  co2ts,  and  to  insurs 
purchase  of  goods  on  most  advantageous  terms. 

•  From  James  Ford,  Co-operation  in  New  England,  pp.  6-8.     Survey  Asscc'itec, 
1913- 


SOME  PROGRAMS  OF  SOCIAL  REFORM  905 

Payment  of  not  more  than  5  per  cent  interest  on  shares,  the  rest 
of  the  profits,  after  deduction  for  depreciation  and  reserve,  to  go 
partly  to  an  educational  fund,  partly  to  charity,  and  the  remainder 
to  be  distributed  to  purchasers  whether  members  or  not,  in  pro- 
portion to  their  trade  at  the  store. 


262.     CO-OPERATIVE  CREAMERIES' 

In  its  pure  form  a  co-operative  creamery  association  is  an  associa- 
tion of  local  milk  producers  who  by  combined  capital  in  shares  of 
low  denomination  build  or  purchase  a  creamery,  primarily  for  the 
manufacture  and  sale  of  butter.  Such  associations  pay  a  fixed,  low 
rate  of  interest  on  shares  and  distribute  other  net  earnings  to  milk 
producers  according  to  the  amount  of  butterfat  in  the  milk  they 
furnish.  Furthermore,  they  grant  each  member  but  one  vote,  irre- 
spective of  the  number  of  shares  he  holds. 

There  are  also  among  creameries,  exactly  as  among  co-operative 
stores  and  factories,  many  organizations  that  bear  the  name  "co- 
operative," but  which  differ  from  the  pure  type  in  that  voting  by 
shares  is  allowed.  Such  organizations  have  a  certain  right  to  the 
name  "co-operative,"  since  they  are  formed  by  large  bodies  of  small 
local  producers,  organized  to  save  themselves  from  the  evils  of  indi- 
vidual production  and  bargaining.  When  such  societies  keep  their 
membership  open  to  all  honest  producers  of  the  locality  who  desire 
to  join,  and  when  they  devote  all  earnings  above  6  per  cent  interest 
on  shares  to  increase  the  payment  to  patrons  for  milk,  they  are  by 
intention  co-operative  and  are  so  considered  by  the  community  in 
which  they  are  situated,  especially  when  compared  with  the  pro- 
prietary or  joint-stock  creameries  of  small  and  exclusive  membership 
which  may  exist  in  the  locality. 

To  the  co-operative  creamery,  farmers  within  a  radius  of  10  miles 
or  more  may  bring  their  cream  or  whole  milk  daily.  All  but  the 
smallest  creameries  have  "gatherers"  who  go  from  farm  to  farm 
among  the  patrons  to  collect  the  cream.  Sometimes  a  compromise 
is  effected  where  farms  are  inaccessible,  and  sub-stations  are  assigned 
to  which  farmers  bring  their  cream,  thus  simplifying  the  gatherers' 

■  From  James  Ford,  Co-operation  in  New  England,  pp.  134-39.  Survey 
Associates,  1913. 

[For  another  instance  of  co-operation  in  the  disposal  of  agricultural  products 
see  Selection  98,  "Co-operative  Fruit  Marketing." — Editors.) 


9o6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

work  and  lessening  the  cost  of  this  section  of  creamery  expenditure. 
Once  brought  to  the  station  the  butter  fat  is  separated  by  mechanical 
apparatus  and  is  made  over  into  butter.  The  process  is  simple; 
requires  but  small  outlay  of  capital,  $i,ooo  to  $3,000,  and  the  employ- 
ment usually,  aside  from  gatherers  and  sales  agents,  of  not  more  than 
two  employees  within  the  creamery. 

One  of  the  largest  and  most  successful  of  these  creameries  is  the 
Hampton  Co-operative  Creamery  Association  of  Easthampton, 
Massachusetts,  founded  in  1881.  It  had  in  191 1  43  shareholders, 
mostly  of  Yankee  birth,  who  held  among  them  $2,500  of  capital 
stock  in  twenty-five-dollar  shares.  They  own  $3,000  worth  of  real 
estate  free  from  mortgage  and  have  a  reserve  of  $4,623.  Sales  for 
the  year  1910  amounted  to  $86,914  from  the  profits  of  which  6  per 
cent  interest  on  shares  was  paid  to  members,  the  balance  going  to  all 
patrons  whether  members  or  not  according  to  the  amount  of  butterfat 
in  the  milk  they  sold  to  the  creamery.  An  average  of  40  cents  per 
pound  was  paid  patrons  for  butterfat — a  sum  equaled  by  only  one 
other  of  the  reporting  co-operative  creameries  of  New  England. 

The  business  of  the  society,  according  to  the  Daily  Hampshire 
Gazette,  is  "  one  of  the  most  prosperous  business  ventures  in  our  town." 
During  the  year  1907  the  society  received  730,285  pounds  of  cream 
yielding  131,844  pounds  of  butterfat,  and  made  155,342  pounds  of 
butter,  an  average  of  496  pounds  per  day;  $7,610  worth  of  cream 
was  sold  and  $1,440  worth  of  buttermilk,  which  until  very  recent 
years  was  thrown  away.  A  wholesale  house  of  a  neighboring  city 
purchases  their  entire  output.  The  butter  is  made  in  a  light  and 
clean  basement  room  of  a  model  New  England  farmhouse  in  East- 
hampton, under  conditions  which  should  satisfy  the  most  exacting 
customer.  The  association  has  further  established  a  deserved  repu- 
tation among  producers  for  absolute  integrity  by  never  during  twenty- 
seven  years  having  failed  to  send  its  checks  to  patrons  for  their  milk 
on  the  day  payment  fell  due. 

Patrons,  many  of  whom  are  not  stockholders,  are  admitted  to 
annual  meetings  and  are  given  opportunity  to  talk. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  907 

263.    CO-OPERATIVE  STORES' 

The  Riverside  Co-operative  Association  is  situated  in  Maynard, 
Massachusetts,  a  textile  town  with  a  population  of  6,400.  At  the 
close  of  the  fiscal  year,  December  31,  1909,  the  society  comprised 
about  600  members — ^Americans,  English,  Scotch,  Irish,  Swedes, 
Danes,  Finns,  and  French — workers  in  the  woolen  mills  of  the  town, 
earning  a  typical  wage  of  $10  to  $15  a  week.  The  capital  stock  in 
1910  was  $14,710,  divided  into  shares  of  $5.00  each,  no  member 
holding  over  60.  The  real  estate  of  the  association,  which  consists 
of  a  large,  three-story  wooden  building,  was  estimated  at  $11,000, 
mortgaged  for  $1,500;  stock  on  hand  was  $8,600;  there  was  also  a 
reserve  fund  of  $4,700.  Total  sales  during  1908  amounted  to  $83,000. 
Besides  6  per  cent  interest  paid  on  shares,  an  8  per  cent  dividend  was 
allowed  on  trade  during  the  first  half  year,  and  a  5  per  cent  dividend 
in  the  second  half  year  (January,  1908,  to  June,  1908).  In  all,  the 
sum  of  $4,860  in  dividends  had  been  distributed  during  that  year. 
Credit  is  given  only  to  members.  Seven  of  the  11  employees  are 
shareholders.  Attendance  of  75  members  at  meetings  can  be  counted 
upon.  It  is  probable  that  no  co-operative  store  in  urban  New  Eng- 
land has  a  wider  local  influence  among  the  English-speaking  popula- 
tion of  the  community  than  has  this  association.  By  careful  manage- 
ment, shrewd  by-laws,  and  high  ideals,  it  has  continuously  attested 
the  value  of  the  co-operative  method. 

The  largest  workingman's  co-operative  society  in  New  England 
today  is  the  Lowell  Co-operative  Association  (Sovereigns  of  Industry), 
of  Lowell,  Massachusetts.  Organized  in  1876,  this  society  had  in 
June,  191 1,  about  2,200  workingmen  shareholders,  mostly  Irish,  and 
a  capital  stock  of  $13,895,  in  shares  of  $5.00  each.  There  was 
$26,400  invested  in  real  estate  free  of  mortgage.  Sales  of  groceries 
and  coal  amounted  to  almost  $220,000.  Four  per  cent  interest  was 
paid  on  shares,  7  per  cent  dividends  on  shareholders'  purchases,  and 
5j  per  cent  to  "members" — general  patrons  who  pay  25  cents  to 
the  society  and  receive  f  of  the  regular  dividend  on  purchases  without 
owning  shares.  In  all,  from  $10,000  to  $15,000  has  been  distributed 
annually  as  dividends  on  purchases.  Arrangements  are  also  made 
with  seven  local  dealers  in  clothing,  boots  and  shoes,  furniture, 
cutlery,  and  other  wares  for  7  per  cent  discount  to  stockholders. 

'  From  James  Ford,  Co-operation  in  New  England,  pp.  25-27.  Survey  Asso- 
ciates, 19 13. 


goS  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

This  is  apparently  the  oldest  New  England  society  that  has  secured 
and  retained  the  trade  discount  system.  Under  continuous,  pains- 
taking management  this  association  has  in  twenty  years  progressed 
from  ninth  to  first  place  in  amount  of  annual  trade.  By  democratic 
voting,  by  restriction  of  credit  to  members  only,  and  by  inducing 
its  employees  to  become  shareholders,  it  has  made  co-operation  grow 
out  of  difficult  racial  material  and  in  the  choking  environment  of 
one  of  the  largest  mill  towns  of  America. 


264.    CAUSES  OF^THE  FAILURE  OF  CO-OPERATIVE  STORES 

IN  AMERICA' 

"In  this  country  Co-operative  Distribution  has  been  marked 
by  almost  utter  failure.  So  universal  has  been  the  disaster  that  has 
followed  all  attempts  to  save  money  in  purchasing  goods  of  any  kind, 
that  the  name  'Co-operative  Store'  has  become  to  the  ordinary  mind 
a  term  of  derision."* 

The  causes  for  this  almost  universal  failure  of  the  co-operative 
movement  are  manifold,  and  many  of  them  are  peculiar  to  this 
country  and  to  the  American  people. 

Since  its  commencement,  the  co-operative  movement  in  the 
United  States  has  never  been  satisfactorily  organized.  Even  to-day 
there  are  but  three  states  which  have  any  kind  of  an  organization, 
and  in  none  of  these  is  it  what  it  should  be.  Fought  from  all  sides 
as  are  these  co-operative  enterprises,  it  is  surprising  to  realize  how 
few  attempts  have  been  made  to  organize  them  into  protective 
associations.  It  is  still  more  surprising  to  find  the  lack  of  informa- 
tion which  exists  among  the  co-operators  relative  to  the  whereabouts 
and  the  status  of  co-operative  stores.  Managers  of  associations  in 
one  county  do  not  know  that  other  similar  organizations  are  to  be 
found  in  the  adjoining  county,  and  when  it  comes  to  the  matter  of 
the  co-operative  movement  in  the  state  at  large,  there  is  no  one  who 
is  able  to  give  a  complete  list  of  the  stores  or  their  location.  This 
is  due  primarily  to  the  fact  that  the  associations  have  no  central 
organization  to  which  they  can  make  reports.  In  but  three  states 
are  annual  meetings  held  for  the  discussion  of  co-operative  matters 

'  Adapted  from  Ira  B.  Cross,  "The  Co-operative  Store  in  the  United  States," 
pp.  45-50,  in  the  Twelfth  Biennial  Report  of  the  Bureau  of  Labor  and  Industrial 
Statistics,  Wisconsin,  1905-6. 

*  Barnard,  Co-operation  as  a  Business,  p.  log. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  909 

by  the  co-operators  themselves,  while  but  two  attempts  at  holding 
a  national  convention  have  ever  matured.  The  success  of  the  latter 
in  neither  case  was  very  gratifying.  Compare  these  feeble  efforts 
with  the  solid  organizations  of  the  retail  grocers,  the  jobbers,  and 
the  wholesalers!  Annual  conventions  of  co-operative  societies  should 
be  held  in  each  state.  These  associations  should  elect  representa- 
tives to  a  National  Co-operative  Congress  which  should  likewise 
be  held  each  year.  Without  such  conferences,  without  state  and 
national  organization,  we  may  expect  to  .see  the  continued  failure 
of  the  co-operative  movement. 

Another  cause  for  the  many  wrecks  which  lie  strewn  over  the 
field  of  Consumers'  Co-operation  is  the  fact  that  in  times  past  there 
have  been  no  wholesale  houses  from  which  the  retail  co-operative 
stores  could  obtain  their  supplies.  They  have  been  forced  to  pur- 
chase their  stock  from  the  same  wholesale  house  as  the  other  retail 
merchants.  The  latter  have  consistently  been  successful  in  forcing 
the  wholesaler  to  discriminate  against  the  co-operative  stores,  and 
the  consequence  has  been  that  the  latter  have  had  to  pay  higher 
prices  for  all  goods  purchased.  In  some  instances  the  wholesalers 
have  absolutely  refused  to  deal  with  the  co-operators.  These  things 
cannot  help  but  result  in  placing  the  latter  at  a  disadvantage  in  the 
sale  of  goods  to  the  public,  and  have  been  a  fruitful  source  for  the 
failure  of  these  co-operative  enterprises.  Today  we  have  two  whole- 
sale houses  for  the  co-operative  stores,  one  of  which  is  composed 
entirely  of  co-operative  societies,  and  the  other  but  partly.  These 
have  proved  to  be  a  godsend  to  the  movement  and  have  greatly 
assisted  in  its  upbuilding.  It  is  expected  that  many  more  of  these 
wholesale  companies  will  be  started  in  the  future  as  a  result  of  the 
continued  development  of  the  co-operative  movement. 

Then  too  there  is  lack  of  the  true  co-operative  spirit.  We  Ameri- 
cans are  primarily  a  selfish  people.  We  have  always  been  very 
individualistic  in  our  ideas  and  actions.  We  have  been  accustomed 
to  enjoy  the  bounties  of  Nature,  the  privilege  of  taking  up  land,  of 
shifting  our  residence  to  accept  new  employment  if  the  conditions 
of  the  old  were  not  satisfactory.  All  of  these  things  have  made  us 
an  independent  people  in  most  of  our  actions.  We  dislike  to  surrender 
our  individuality  to  the  will  of  the  majority.  We  are  also  a  hetero- 
geneous people,  composed  of  many  nationalities,  and  as  is  the  case 
with  such  nations,  it  has  been  a  difficult  task  to  weld  the  different 
races  into  a  homogeneous  body,  a  body  which  will  work  and  labor 


QIO  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

toward  an  ideal  or  goal  as  one  people.  Likewise  we  lack  that  fixity 
of  population,  that  neighborhood  life,  which  is  so  characteristic  of 
European  countries.  We  are  also  an  impetuous  people.  We  luck 
patience.  We  dislike  to  wait  for  the  accumulation  of  dividends,  and 
would  rather  trade  at  those  stores  which  give  "green  trading  stamps." 
If  the  enterprise  in  which  we  are  interested,  does  not  prove  to  be 
immediately  successful,  we  lose  heart  and  turn  our  energies  to  other 
fields. 

Our  comparatively  high  standard  of  living  has  not  forced  us  to 
acquire  the  penny  saving  habit  so  common  among  the  Europeans. 
We  would  rather  give  profits  to  the  merchant  as  his  pay  for  the 
management  of  the  retail  busmess  of  America  than  bother  ourselves 
with  the  intricacies  of  the  matter.  We  also  desire  a  wide  choice  of 
goods  from  which  to  pick  whenever  we  enter  a  store.  As  Americans, 
we  have  not  become  accustomed  to  the  simple  and  monotonous 
meals  of  the  Europeans.  We  desire  variety  of  food  as  well  as  variety 
of  clothing.  The  co-operative  stores,  however,  owing  to  their  limited 
capitalization,  cannot  furnish  us  with  this  wide  choice  of  goods. 
Hence  we  usually  trade  at  other  places  even  though  we  are  members 
of  the  co-operative  association.  This  lack  of  loyalty  on  the  part  of 
the  members  has  been  a  very  important  factor  in  the  failure  of  the 
co-operative  movement  in  the  United  States. 

The  greatest  cause  of  all,  however,  is  the  lack  of  business  knowl- 
edge, so  conspicuous  among  the  co-operators.  They  take  a  man 
from  his  plow,  like  Cincinnatus  of  old,  and  place  him  in  charge  of  a 
co-operative  store  expecting  that  he  will  carry  on  the  business  satis- 
factorily. Or  as  it  often  happens,  a  man  will  be  called  from  behind 
a  machine  in  the  factory,  after  having  had  no  business  experience 
other  than  the  payment  of  bills  which  his  wife  may  have  contracted, 
and  placed  behind  the  manager's  desk.  The  usual  result  is  that 
sooner  or  later  the  co-operators  find  that  the  person  in  whom  they 
have  placed  their  faith  is  either  incompetent  or  dishonest,  and  the 
store  is  a  failure.  Poor  business  methods,  injudicious  purchases, 
over-stocking,  wastes  in  weighing,  and  many  other  practices,  all  of 
which  bring  disastrous  results,  are  very  prominent  in  the  co-operative 
movement.  These,  together  with  the  universal  ignorance  of  the 
co-operators  regarding  business  matters,  and  the  lack  of  loyalty 
displayed  by  them,  have  been,  in  general,  the  fundamental  causes 
for  the  failure  of  these  stores. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  911 

265.    WASTES  IN  THE  COMPETITIVE  DISTRIBUTION  OF 

MILK' 

PRESENT   SYSTEM  AN  EFFICIENT  SYSTEM 

173  distributors,  requiring  services  A  single  efficient  agency  could  ren- 

of  der  superior  service  with 

356  men  and  many  families  90  men 

360  horses  50  horses 

305  milk  wagons  25  horse  drawn  trucks  and 

6  motor  trucks 

2509  miles  delivering  300  miles  travel 

62,300  quarts  of  milk  to  45,000  $75,000  equipment  of  one  sanitary 

homes  milk  depot 

$76,600  invested  in  milk-room  $100,000  buildings  and  real  estate 

equipment 
$108,800  invested  in  horses  and 

wagons 
$282,500  total  investment 

$2,000  total  daily  cost  of  distribu-  $600  estimated  daily  cost  of  dis- 

tion  tribution 

$720,000  yearly  cost  $220,000  estimated  yearly  cost 

The  economies  resulting  from  efficient  distribution  besides 
providing  better  service  and  purer  milk  would  permit  of  a  saving  of 
at  least  $500,000  yearly. 


266.    SOCIALISM* 

I.      DEFINITION 

Few  movements  have  been  more  widely  discussed  and  at  the 
same  time  more  vaguely  defined  than  socialism.  The  movements 
to  which  the  term  applies  have  been  so  diverse  in  starting-point  and 
in  goal,  so  variously  colored  by  individual  experience  and  social 
environment,  that  the  common  element  is  often  difficult  to  discern. 
Socialism  has  always  been  an  opposition  policy,  and,  as  is  the  way 
with  oppositions,  under  its  banner  have  marched  the  most  motley 
forces,  at  one  chiefly  in  that  all  were  passionately  protesting 
against  Things  as  They  Are.  It  has  not  yet  been  codified  and  delim- 
ited by  the  actualities  of  office.    It  is  a  living  movement,  changing 

»  From  a  statement  displayed  at  the  191 2  exhibit  of  the  National  Dairy  Show 
Association,  Chicago.    The  figures  described  actual  conditions  in  an  American  city. 

'  Adapted  from  O.  D.  Skelton,  Socialism:  A  Critical  Analysis,  pp.  1-3,  16-39. 
Houghton  Mifflin  Co.,  191 1. 


912  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

insensibly  with  every  change  in  the  mental  horizon  or  material 
conditions  of  the  time,  and  so  impossible  to  label  with  the  cheerful 
finality  with  which  the  scientist  treats  a  paleolithic  fossil.  The 
significance  of  the  term  is  still  further  clouded  by  its  frequent  use 
as  a  bogey  with  which  to  ward  off  any  assault  whatever  on  vested 
rights  or  vested  wrongs — though  ser\iceability  for  this  scarecrow 
function  is  happily  declining — and  by  the  counter-tendency,  wherever 
disrepute  gives  place  to  vogue,  of  sundry  well-meaning  sentimentalists 
to  adopt  the  label  to  denote  their  half-baked  yearnings. 

Definiteness  may  most  easily  be  given  the  conception  by  con- 
sidering it  in  its  relation  to  the  existing  industrial  system,  which 
socialists  are  wont  to  summarize  as  capitalism.  This  relation  pre- 
sents four  main  aspects,  which  may  be  noted  briefly. 

Socialism  is  in  the  first  place  an  indictment  of  any  and  all  indus- 
trial systems  based  on  private  property  and  competition.  The 
indictment  is  urged  hotly  and  with  unsparing  detail,  in  ponderous 
treatise  and  fleeting  pamphlet,  through  party  organs  and  on  party 
platforms. 

Socialism  in  the  second  aspect  presents  an  analysis  of  capitalism. 
Its  origin  is  accounted  for,  and  its  present  working  described.  This 
analysis  is  undertaken  with  very  diflferent  motives  according  as  the 
reigning  philosophical  prepossessions  vary.  To  the  Utopian  believer 
in  the  benevolence  of  all  Nature's  intentions  and  the  preordained 
harmony  of  the  world,  it  seems  necessary  to  account  for  the  wide 
divergence  between  design  and  reality.  To  the  more  recent  thinker, 
saturated  with  Hegelian  or  Darwinian  conceptions  of  development, 
scientific  discussion  inevitably  runs  in  terms  of  final  goal  or  of  origins. 
Whatever  the  standpoint,  this  phase  of  the  subject  is  rarely  lacking 
in  any  fully  developed  socialistic  system. 

From  a  third  viewpoint  socialism  presents  a  substitute  for 
capitalism.  More  or  less  in  detail,  according  as  theoretical  or  tactical 
exigencies  necessitate,  every  socialist  system  forecasts  the  ideal 
co-operative  commonwealth  that  is  to  be.  The  ideal  of  the  future 
of  course  varies  with  the  analysis  of  the  present;  prescription  follows 
diagnosis.  But,  neglecting  minor  variations,  socialism  in  this  aspect 
may  be  defined  as  the  demand  for  collective  ownership  and  utilization 
of  the  means  of  production  and  for  distribution  of  the  social  dividend 
in  accordance  with  some  principle  of  justice. 

Finally,  socialism  involves  a  campaign  against  capitalism.  Here 
variation  is   at   the   maximum.     The   tactics  adopted  have   taken 


SOME  PROGRAMS  OF  SOCIAL  REFORM  913 

many  forms,  peaceful  persuasion  and  armed  revolt,  parliamentarism 
and  syndicalism,  experimenting  with  "duodecimo  editions  of  the 
New  Jerusalem"  and  waiting  for  capitalism  to  dig  its  own  grave. 
In  each  case  the  tactics  in  the  campaign  bear  a  necessary  relation 
to  the  theoretical  analysis  consciously  or  unconsciously  adopted  and 
to  the  industrial  and  racial  environment. 

In  each  of  these  aspects — ^indictment,  analysis,  panacea,  cam- 
paign— socialism  is  intelligible  only  as  the  antithesis  of  the  competi- 
tive system.  It  has  followed  private  property  like  its  shadow. 
In  every  great  period  of  social  readjustment,  where  in  the  shifting  of 
economic  foundations  and  the  decay  of  traditional  moral  restraints 
an  untrammeled  individualism  temporarily  asserts  itself,  we  find  an 
inevitable  socialist  reaction.  Since  it  is  within  the  past  century  or 
two,  the  period  since  what  is  called  pre-eminently  the  Industrial 
Revolution,  that  the  economic  motive  has  most  widely  dominated 
men's  activities  the  world  over,  and  that  within  the  economic  field 
the  spirit  of  individualism  has  had  freest  play,  it  is  within  this  same 
period  that  socialism  has  reached  fullest  and  clearest  development. 

n.      THE   SOCIALIST  INDICTMENT 

It  is  in  their  indictment  of  the  existing  order  that  socialists  are 
most  in  harmony.  Theorists  who  are  poles  apart  in  the  remedies  or  the 
tactics  they  propose  join  forces  in  anathematizing  the  common  enemy. 
There  is,  of  course,  wide  variation  in  the  relative  emphasis  laid  on 
the  different  counts,  a  variation  corresponding  to  some  extent  to  the 
differences  in  the  analytical  viewpoints  adopted:  to  one  school  the 
parasitical  middleman  is  the  worst  offender,  to  another  the  exploiting 
capitalist;  to  one  the  anarchy  of  production  is  the  rock  of  offense, 
to  another  the  unfairness  of  distribution;  the  moralist  bemoans  the 
low  ethical  standards  of  a  competitive  society,  and  the  artist  the 
hideousness  of  its  products.  But  the  ammunition  is  freely  exchanged; 
whatever  the  main  charge  be,  the  more  ills  that  can  be  laid  at  the  door 
of  competition  and  private  property  the  better.  So  the  twentieth- 
century  socialist  repeats  tbe  fiery  denunciations  of  John  Ball,  and 
Morris  and  Marx  find  common  ground. 

The  success  of  socialist  agitation  depends  not  merely  on  the 
existence  of  serious  industrial  evils,  but  on  the  readiness  of  the  masses 
of  men  to  hearken  to  a  gospel  of  discontent.  Before  reviewing 
the  objective  facts  of  modern  industrial  life  against  which  criticism 
is  directed,  it  is  advisable  to  consider  the  subjective  factor.    However 


914  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

black  the  ills  that  are  charged  against  capitalism,  few  socialists  will 
contend  that  misery  and  oppression  are  new  in  the  world.  To 
understand  why  a  fiercer  resentment,  a  wider  revolt  prevails  today 
than  ever  before  in  history,  it  is  necessary  first  to  glance  at  the  psy- 
chology of  modern  social  unrest. 

Not  least  important  among  the  causes  of  the  increasing  discontent 
is  the  betterment  in  the  condition  of  the  masses.  Spencer  has  called 
attention  to  the  curious  paradox  that  frequently  "the  more  things 
improve  the  louder  become  exclamations  about  their  badness."  So 
with  the  condition  of  the  average  workingman  of  today  as  compared 
with  that  of  his  ancestors.  It  is  beyond  question  that  wages  are 
higher,  hours  are  shorter,  housing  is  better,  the  death-rate  lower. 
The  state  and  private  and  institutional  philanthropy  have  been 
active  to  unparalleled  degree  providing  for  him  free  education,  free 
museums,  free  parks.  Yet  all  these  betterments  have  merely  served 
to  whet  the  appetite  for  more,  to  nourish  the  spirit  of  resistance,  to 
foster  a  "divine  discontent."  The  hopelessness  of  utter  poverty 
and  ignorance  crushes;  a  half  advance  rouses  fierce  demand. 

At  the  same  time  that  ambition  is  stirred,  the  goal  tantalizingly 
recedes  into  the  distance.  Not  merely  is  demand  stiffened;  its 
scope  is  immensely  widened.  The  higher  pedestal  has  opened  new- 
horizons :  heavens  undreamed  of  have  been  glimpsed.  The  growth 
of  your  wants  outfoots  the  growth  of  your  ability  to  supply  them. 
A  smaller  proportion  of  your  demand  is  effectual,  as  the  economists 
remark.  For  your  standard  is  set,  not  by  your  outgrown  self,  nor  by 
your  ancestor  dead  and  gone,  but  by  the  more  fortunate  about  you. 
Standards  have  advanced  faster  than  incomes.  The  luxuries  of 
yesterday  become  today's  necessities.  More  and  more,  home  services 
and  preparations  are  replaced  by  the  tempting  but  expensive  con- 
veniences of  the  open  market.  Speed  and  up-to-dateness  must  be 
had  at  any  cost. 

Democracy  sharpens  the  sting  of  economic  inequality.  Equal 
votes  suggest  equal  purses.  By  a  taking  analogy  industrial  democ- 
racy appeals  as  the  inevitable  complement  of  political  democracy. 
Plutocratic  prejudices  against  the  ability  of  the  people  to  govern 
themselves  in  the  matter  of  making  a  living  must  go  the  way  of 
outworn  aristocratic  prejudices  against  the  people's  ability  to  govern 
themselves  in  aflFairs  of  state.  When  men  are  born  and  work  and  die 
within  the  limits  of  caste,  and  are  trained  to  pray  Providence  to  keep 
them  in  their  proper  stations  and  bless  the  Squire  and  his  relations, 


SOME  PROGRAMS  OF  SOCIAL  REFORM  91$ 

it  is  only  the  few  hardiest  spirits  who  dream  of  questioning  the  justice 
of  their  lot.  But  when  the  barriers  of  caste  are  down,  and  democratic 
theory  teaches  that  every  man  is  as  good  as  his  neighbor,  then  the 
case  is  altered.  It  may  well  be  that  the  gap  between  modern  million- 
aire and  tenement  dweller  is  less  than  the  gap  between  mediaeval 
lord  and  peasant,  but  the  peasant  did  not  compare  himself  with  his 
lord. 

At  the  same  time  the  old  ties  which  had  enforced  content  have 
weakened.  In  Europe  the  church  has  long  been  the  bulwark  of 
Things  as  They  Are.  The  teaching  of  Jesus  as  to  the  future  life 
has  not  rarely  been  perverted  into  a  consolation  offer  for  the  losers 
in  this  world's  race.  Let  Lazarus  content  himself  with  the  crumbs 
from  Dives'  table  in  this  brief  second  we  call  time,  and  through 
eternity  he  shall  inherit  pearly  mansions,  and  may  look  down  on 
Dives  vainly  striving  to  enter  the  needle's  eye  or  writhing  in  hell- 
fire.  Lassalle's  gibe  about  payment  by  checks  on  the  Bank  of  Heaven 
had  enough  truth  in  it  to  hurt.  The  church  today  is  reawakening 
to  her  social  duty,  but  the  harm  has  been  done 

The  massing  of  men  in  great  cities,  subject  to  the  socializing 
influence  of  the  factory  and  the  amusement  park,  tends  in  the  same 
direction.  The  isolated  farmer  or  the  artisan  in  his  self-sufficient, 
impervious  village  group  clings  tenaciously  to  an  individualist  ideal. 
The  tenement  dweller  or  the  mine  worker,  cut  loose  from  his  native 
environment,  acted  on  every  hour  by  socializing  influences,  turns 
more  readily  to  socialism. 

More  subtle  and  pervasive  is  the  effect  ascribed  to  machine 
industry  itself.  Professor  Veblen  assigns  to  the  machine  process  a 
disciplinary  and  selective  effect  on  the  habits  of  thought  of  the  work- 
men closest  in  touch  with  it.  Their  reasoning  comes  to  run  in  terms, 
not  of  anthropomorphism  and  conventional  precedent,  but  of  "  opaque, 
impersonal  cause  and  effect."  Arguments  based  on  authenticity  and 
usage  or  even  on  the  once  revolutionary  basis  of  natural  rights  cease 
to  have  meaning.  Especially  does  the  "natural  rights  institution 
of  property"  fall  into  disfavor.  Without  pressing  the  point  unduly, 
it  seems  undeniable  that  it  is  only  among  the  industrial  classes  of 
the  industrial  nations  that  socialism  has  won  wide  adherence.  Men 
engaged  in  pecuniary  rather  than  in  industrial  employments,  though 
equally  property  less,  are  immune. 

The  miracles  of  nineteenth-century  science  have  helped  to  accus- 
tom men's  minds  to  schemes  of  revolutionary  change.    We  have 


9l6  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

mastered  nature,  have  weighed  the  sun  and  flashed  messages  across 
the  ocean,  have  harnessed  steam  and  electricity  to  do  our  bidding, 
and  shrunk  the  huge  earth's  circumference  to  a  forty-day  Cook's 
tour.  To  optimistic  minds  it  seems  but  child's  play,  compared  with 
such  achievements,  to  alter  the  economic  system  under  which  we  live. 

Finally  it  may  be  noted  what  facilities  for  propaganda  have  been 
created  by  the  new  mobility  of  labor,  the  ease  of  transportation,  the 
rise  of  the  popular  press.  The  barriers  which  a  few  centuries  ago 
made  it  possible  to  isolate  a  radical  force  have  broken  down;  now  all 
the  world's  the  stage.  Criticism  has  proved  a  commercial  success: 
the  press  prefers  ten  proletarian  coppers  to  one  plutocratic  nickel. 
The  fierce  yellow  light  that  beats  upon  a  multi-millionaire  keeps 
the  sins  of  wealth  ever  before  us. 

Thus  socialism  has  found  the  ground  ready  for  the  seed  of  discon- 
tent. What  seed  has  been  sown?  What  are  the  chief  counts  in 
the  indictment  brought  against  capitalism  ? 

Applying  first  the  touchstone  of  efl5ciency  in  the  production  of 
material  goods,  it  is  charged  that  the  competitive  system  has  lamen- 
tably failed.  The  provision  of  society's  requirements  as  a  by-product 
of  individual  self-seeking  has  broken  down.  Private  profit  is  far 
from  coinciding  with  social  gain. 

In  the  first  place,  it  is  charged,  laissez-faire  breaks  down  in  that 
wide  range  of  cases  where  utilities  of  undeniable  importance  are  not 
provided  because  incapable  of  private  appropriation  and  sale.  The 
importance  of  forest  preservation  for  conserving  moisture  is  undeni- 
able. But  climate  and  rainfall  cannot  be  packaged  and  trafficked  in, 
and  so  our  forests  are  swept  down  by  axe  and  fire.  A  lighthouse 
might  be  absolutely  essential  on  some  dangerous  promontory,  but 
profit-making  enterprise  would  halt  if  circumstances  made  it  impos- 
sible to  collect  a  toll  from  benefited  ships. 

Even  more  serious  is  the  loss  entailed  when  the  lure  of  profit 
attracts  too  large,  rather  than  too  small,  a  proportion  of  the  com- 
munity's working  forces  into  particular  channels.  Conservative 
trust  apologists  have  helped  radical  socialist  critics  to  make  the 
wastes  of  competition  a  commonplace  in  our  thinking.  The  middle- 
man is  again  under  suspicion,  as  in  the  days  when  forestallers,  engross- 
ers, and  regraters  troubled  the  common  weal.  The  contrast  between 
the  planless  distribution  of  milk  by  a  score  of  competing  dealers 
serving  a  single  street,  and  the  systematic  distribution  of  mail  by  a 
central  authority,  has  grown  hoary  in  socialist  service.    Especially 


SOME  PROGRAMS  OF  SOCIAL  REFORM  917. 

in  the  field  of  public  utilities,  where  increasing  returns  are  the  rule, 
the  waste  of  competition  is  obvious — in  parallel  railroads,  competing 
gas  companies,  duplicated  electric  light  or  power  plants. 

Competitive  selling-costs  bulk  very  large  in  the  "cost  of  produc- 
tion" of  all  commodities.  This  is  clearest  in  the  case  of  advertising. 
To  a  varying  extent  modern  advertising  is  doubtless  informative, 
guiding  and  stimulating  the  wants  of  customers.  But  for  the  most 
part  it  is  merely  competitive,  catering  to  existing  wants.  Such 
advertising  "does  not  add  to  the  serviceability  of  the  output,  unless 

it  be  incidentally  and  unintentionally It  gives  vendibility, 

which  is  useful  to  the  seller,  but  has  no  utility  to  the  last  buyer." 
Conservative  economists  estimate  this  waste  at  half  the  selling-price 
in  many  lines.  In  great  part  the  work  of  office  force  and  field  force 
is  equally  void  of  social  utility.  Nor  is  the  waste  ended  when  the 
deal  is  closed:  the  Chicago  manufacturer  may  have  sold  his  goods 
in  New  York,  and  the  New  York  manufacturer  in  Chicago,  so  that 
the  item  of  cross-freights,  serious  in  bulky  wares,  is  still  to  be  reckoned. 
For  further  details  of  competitive  waste  we  have  only  to  consult 
the  latest  trust  prospectus. 

Nowhere,  the  indictment  continues,  does  capitalism  break  down 
more  conspicuously  than  in  the  equilibration  of  demand  and  supply. 
Production  in  competitive  society  is  planless  and  anarchical.  Hap- 
hazardly scattered  producers  prepare  to  meet  the  guessed-at  demands 
of  world-wide  consumers.  The  adjustment  is  never  exact.  At 
times  it  fails  utterly,  in  the  periodical  crises  which  throw  the  indus- 
trial mechanism  hopelessly  out  of  gear.  "  Commerce  is  at  a  stand- 
still, the  markets  are  glutted,  hard  cash  disappears,  factories  are 
closed,  the  mass  of  the  workers  are  in  want  of  the  means  of  sub- 
sistence." 

The  case  for  competition  is  no  more  favorable  when  we  turn 
from  quantity  to  quality  of  products.  "Adulteration  is  a  form  of 
competition,"  was  the  frank  apology  offered  by  John  Bright.  The 
advance  of  science  and  original  sin  have  made  it  possible  to  counter- 
feit almost  every  article  of  common  household  use,  the  more  easily 
because  of  the  lack  of  experience  of  the  final  purchaser.  Even  in 
Tennyson's  day  "  chalk  and  alum  and  plaster  were  sold  to  the  poor 
for  bread,"  and  the  wooden  nutmeg  had  rechristened  a  state.  But  the 
amateur  and  unsophisticated  efforts  of  half  a  century  ago  pale  before 
the  accomplishments  of  today — the  red  raspberry  jam  which  once 
was  gelatin,  analine,  and  timothy  seed;    the  prune-juice  and  fusel 


9l8  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

oil  masquerading  as  whiskey;  the  chicory  in  the  coffee  and  the  pea- 
hulls  in  the  chicory;  the  artificial  oils  in  the  flavoring-extracts;  the 
labels  we  drink  at  champagne  prices;  the  shoddy  we  are  clothed 
in  and  the  paper  soles  we  walk  on;  the  "  Corot"  on  our  walls  with  its 
paint  scarce  dry. 

Nor  is  it  only  in  the  selling  of  commodities  that  this  fraud  is 
charged.  "The  genius  of  graft,"  declares  a  socialist  satire,  "mani- 
fests itself  in  nearly  all  branches  of  human  activity.  Wherever 
something  can  be  got  for  nothing,  wherever  a  pinch  or  a  squeeze  of 
extra  profit  can  be  made  in  a  transaction,  wherever  falsehood  can  be 
made  to  do  duty  for  truth,  a  pretense  for  accomplishment  or  service, 
there  is  observed  a  metamorphosis  of  the  protean  genius  of  Graft" 
— the  petty  graft  of  the  hackman  or  waiter,  of  the  loan  shark  or  the 
quack  physician  or  the  shyster  lawyer,  of  the  fake  instalment  trade 
or  diploma  factory. 

Even  where  the  quality  of  the  wares  is  honest  enough,  they  have 
lost  all  semblance  of  art  or  seemliness.  The  craftsman's  pride  in 
his  work  has  given  place  to  the  profit-monger's  preoccupation  with  his 
ledger. 

Financial  fraud  is  rated  more  serious  even  than  commercial.  As 
credit  and  corporations  count  for  more  and  more,  the  openings  for 
manipulation  widen.  The  way  is  clear  for  promotion,  running  the 
gamut  from  the  downright  swindle  of  the  cent-a-share  mining  com- 
pany to  the  honest  graft  of  respectable  over-capitalization.  The 
company  once  formed,  the  divergence  of  interest  between  director 
and  shareholder,  temporary  controller  and  permanent  owner,  tempts 
to  all  the  thousand  and  one  devices  of  manipulation. 

So  much  for  the  efficiency  of  the  competitive  system  as  a  means 
of  producing  the  greatest  possible  amount  of  useful  material  goods. 
Rated  even  in  terms  of  goods  and  gear  it  is  condemned.  What  is  the 
loss  and  gain  computed  in  terms  of  human  life,  what  the  conditions 
under  which  the  mass  of  men  labor  to  produce  this  wealth,  what 
their  share  in  the  product  and  the  consequent  measure  of  material 
comfort  and  well-being  attainable?  Here  the  indictment  becomes 
more  serious  and  more  passionate.  For  the  vast  majority,  it  is  urged, 
competition  and  capitalism  spell  misery  and  failure,  a  precarious 
lifelong  battle  with  hunger,  stunted  and  narrowed  development, 
premature  death  or  cheerless  old  age. 

Considering  first  the  conditions  under  which  men  earn  their 
living,  the  socialist  finds  the  majority  sunk  in  "wage  slavery."    The 


SOME  PROGRAMS  OF  SOCIAL  REFORM  919 

capitalist's  control  of  all  the  opportunities  of  labor  gives  him  power 
more  tyrannous  than  the  slave-owner  of  old  ever  held.  No  legal  bond 
compels  the  modern  workman  to  labor  for  his  masters,  but  the  monop- 
oly of  the  means  of  livelihood  is  stronger  than  any  parchment  right. 
The  main  difference  between  the  old  and  the  new  slavery  is  that  the 
modern  slave-driver  is  under  no  obligation  to  keep  his  "hands" 
from  starving.  It  is  for  the  capitalist,  and  the  capitalist  alone,  to 
decide  when  and  where  work  shall  be  begun,  who  shall  and  shall 
not  be  employed,  what  the  manner  of  working  shall  be. 

It  is  not  only  from  lack  of  freedom  that  the  modern  workman 
suflfers.  The  work  which  he  does  at  another's  bidding  is  drearily 
monotonous  work.  The  factory  system  means  for  the  average 
workman  cramping  and  dispiriting  routine,  a  pitifully  limited  hori- 
zon, the  repression  of  all  latent  power  not  needed  for  the  mechanical 
day's  work.  Individuality  is  sacrificed  on  the  altar  of  efficient 
production. 

The  factory  system  not  only  robs  the  workman  of  freedom  and  of 
interest  in  his  task,  the  arraignment  continues,  but  subjects  him  to 
exhausting  and  dangerous  toil.  The  long  hours  which  the  greed  for 
dividends  wrings  from  the  workers  use  up  every  ounce  of  vitaUty, 
prevent  that  rounded  development  which  can  come  only  with  moder- 
ate leisure,  and  wear  life  out  at  such  a  rate  that  at  fifty  the  victim 
must  be  discarded  for  a  younger  man,  scrapped  like  outworn  machin- 
ery. The  danger  of  fatal  or  crippling  accident  is  ever  present,  with 
small  possibility  of  redress  against  the  battalioned  lawyers  of  the 
employer  or  liability  company,  and  with  certainty  of  distress  and 
privation  for  the  family  whose  breadwinner  is  helpless. 

And  for  this  unremitting,  maiming,  and  precarious  toil,  what 
share  falls  to  the  workingman  when  the  time  for  the  distribution  of 
the  joint  product  comes  ?  What  possibilities  of  decent  and  comfort- 
able livelihood  are  placed  at  his  disposal  ?  So  small  a  share,  it  is 
charged,  that  for  the  mass  of  the  workers  the  existing  order  means 
lifelong  poverty.  What  wealth  is  produced  is  distributed  with 
gross  and  incredible  unfairness.  To  the  few,  untold  millions  are 
given,  unlimited  command  over  the  lives  and  services  of  their  fellows, 
opportunity  for  boundless  luxury  and  maddening  display;  to  the 
many,  a  starving  pittance  which  barely  holds  body  and  soul  together 
and  shuts  out  all  hope  of  development  and  culture. 

"In  the  United  Kingdom,"  concludes  a  recent  socialistic  investi- 
gator (Chiozza-Money),  "out  of  a  population  of  43,000,000,  as  many 


g20  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

as  38,000,000  are  poor The   United   Kingdom  is  seen   to 

contain  a  great  multitude  of  poor  people  veneered  with  a  thin  layer 

of  the  comfortable  and  the  rich About  one  seventieth  part 

of  the  population  owns  far  more  than  one-half  of  the  entire  accumu- 
lated wealth,  public  and  private,  of  the  United  Kingdom."  And 
even  in  the  United  States,  with  its  comparative  freedom  from  caste 
and  inherited  privilege,  and  its  half  a  fertile  continent  to  explpit, 
another  socialist  (Hunter)  charges  that  10,000,000  people  are  sunk  in 
poverty,  4,000,000  of  them  in  receipt  of  relief. 

The  fractional  share  of  the  national  dividend  which  falls  to  the 
manual  workers  makes  it  impossible  to  secure  any  more  favorable 
surroundings  for  the  hours  of  leisure  than  for  the  hours  of  work. 
For  the  pittance  that  can  go  for  rent  there  are  available  only  drably 
hideous,  overcrowded,  and  unsanitary  dwellings.  Such  housing 
conditions  as  these  mean  low  vitality  and  constant  exposure  to  infec- 
tion, and  in  view  of  the  workers'  inability  to  obtain  the  needed  rest 
or  change  of  air  or  expert  attention,  involve  a  death-roll  out  of  all 
proportion. 

What  is  the  effect  of  competitive  industrialism  on  moral  life? 
Here  again  the  tally  against  capitalism  is  marked  deep  in  the  socialist 
stick.  "Next  to  intemperance  in  the  enjoyment  of  intoxicating 
liquors,"  declares  Engels,  "one  of  the  principal  faults  of  English 
workingmen  is  sexual  license.  But  this  too  follo\/s  with  relentless 
logic,  with  inevitable  necessity,  out  of  the  position  of  a  class  left  to 
itself,  with  no  means  of  making  fitting  use  of  its  freedom.  The 
bourgeoisie  has  left  the  working  class  only  these  two  pleasures,  while 
imposing  upon  it  a  multitude  of  labors  and  hardships,  and  the  conse- 
quence is  that  the  workingmen,  in  order  to  get  something  from  life, 
concentrate  their  whole  energy  upon  these  two  enjoyments,  carry 
them  to  excess,  surrender  to  them  in  the  most  unbridled  manner." 
The  insufl5ciency  of  the  wages  upon  which  many  a  hard-working  girl 
is  supposed  to  keep  body  and  soul  together  forces  recourse  "to  the 
oldest  trade  in  the  world.  Not  till  we  measure  [this  element  in 
wages]  will  the  world  know  the  true  cost  of  'cheap  labor.'"  Family 
life  becomes  impossible,  what  with  the  absence  of  the  father  and  often 
of  the  mother  all  day  long,  the  frequency  of  marriage  merely  for  the 
support  which  the  woman  cannot  otherwise  obtain,  the  promiscuity 
and  crowding  of  the  workers'  homes. 

And  then  society  adds  insult  to  injury  by  blaming  on  the  individual 
the  lapses  its  own  perverse  social  arrangements  have  caused. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  921 

?67.    THE  NATIONAL  PLATFORM  OF  THE  SOCIALIST  PARTY* 

The  representatives  of  the  Socialist  party  in  National  Convention 
at  Indianapolis,  declare  that  the  capitalist  system  has  outgrown  its 
historical  function,  and  has  become  utterly  incapable  of  meeting  the 
problems  now  confronting  society.  We  denounce  this  outgrown 
system  as  incompetent  and  corrupt  and  the  source  of  unspeakable 
misery  and  suffering  to  the  whole  working  class. 

Under  this  system  the  industrial  equipment  of  the  Nation  has 
passed  into  the  absolute  control  of  a  plutocracy  which  exacts  an 
annual  tribute  of  millions  of  dollars  from  the  producers.  Unafraid  of 
any  organized  resistance,  it  reaches  out  its  greedy  hands  over  the  still 
undeveloped  resources  of  the  Nation — the  land,  the  mines,  the  forests, 
and  the  water  powers  of  every  State  in  the  Union. 

In  spite  of  the  multiplication  of  labor-saving  machines  and 
improved  methods  in  industry  which  cheapen  the  cost  of  production, 
the  share  of  the  producers  grows  ever  less,  and  the  prices  of  all  the 
necessities  of  life  steadily  increase.  The  boasted  prosperity  of  this 
Nation  is  for  the  owning  class  alone.  To  the  rest  it  means  only  greater 
hardship  and  misery.  The  high  cost  of  living  is  felt  in  every  home. 
Millions  of  wage-workers  have  seen  the  purchasing  power  of  their  wages 
decrease  until  life  has  become  a  desperate  battle  for  mere  existence. 

Multitudes  of  unemployed  walk  the  streets  of  our  cities  or  trudge 
from  State  to  State  awaiting  the  will  of  the  masters  to  move  the 
wheels  of  industry. 

The  farmers  in  every  State  are  plundered  by  the  increasing  prices 
exacted  for  tools  and  machinery  and  by  extortionate  freight  rates  and 
storage  charges. 

Capitalism  denounced. — Capitalist  concentration  is  mercilessly 
crushing  the  class  of  small  business  men  and  driving  its  members  into 
the  ranks  of  propertyless  wage-workers.  The  overwhelming  majority 
of  the  people  of  America  are  being  forced  under  a  yoke  of  bondage  by 
this  soulless  industrial  despotism. 

It  is  this  capitalist  system  that  is  responsible  for  the  increasing  bur- 
den of  armaments,  the  poverty,  slums,  child  labor,  most  of  the  insanity, 
crime  and  prostitution,  and  much  of  the  disease  that  afficts  mankind. 

Under  this  system  the  working  class  is  exposed  to  poisonous  con- 
ditions, to  frightful  and  needless  perils  to  life  and  limb,  is  walled 
aroimd  with  court  decisions,  injunctions  and  unjust  laws,  and  is 

'  Text  of  the  platform  adopted  at  Indianapolis,  Ind.,  May  16,  igia. 


92  2  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

preyed  upon  incessantly  for  the  benefit  of  the  controlling  oligarchy  of 
wealth.  Under  it  also,  the  children  of  the  working  class  are  doomed 
to  ignorance,  drudging  toil  and  darkened  lives. 

In  the  face  of  these  evils,  so  manifest  that  all  thoughtful  observers 
are  appalled  at  them,  the  legislative  representatives  of  the  Republican 
and  Democratic  parties  remain  the  faithful  servants  of  the  oppressors. 
Measures  designed  to  secure  to  the  wage-earners  of  this  Nation  as 
humane  and  just  treatment  as  is  already  enjoyed  by  the  wage- 
earners  of  all  other  civilized  nations  have  been  smothered  in  committee 
without  debate,  and  laws  ostensibly  designed  to  bring  relief  to  the 
farmers  and  general  consumers  are  juggled  and  transformed  into 
instruments  for  the  exaction  of  further  tribute.  The  growing  unrest 
under  oppression  has  driven  these  two  old  parties  to  the  enactment  of 
a  variety  of  regulative  measures,  none  of  which  has  limited,  in  any 
appreciable  degree,  the  power  of  the  plutocracy,  and  some  of  which 
have  been  perverted  into  means  for  increasing  that  power.  Anti- 
trust laws,  railroad  restrictions  and  regulations,  with  the  prosecu- 
tions, indictments,  and  investigations  based  upon  such  legislation, 
have  proved  to  be  utterly  futile  and  ridiculous. 

Nor  has  this  plutocracy  been  seriously  restrained  or  even 
threatened  by  any  Republican  or  Democratic  executive.  It  has  con- 
tinued to  grow  in  power  and  insolence  alike  under  the  administrations 
of  Cleveland,  McKinley,  Roosevelt,  and  Taft. 

In  addition  to  this  legislative  juggling  and  this  executive  con- 
nivance, the  courts  of  America  have  sanctioned  and  strengthened  the 
hold  of  this  plutocracy  as  the  Dred  Scott  and  other  decisions  strength- 
ened the  slave  power  before  the  Civil  War. 

We  declare,  therefore,  that  the  longer  sufferance  of  these  conditions 
is  impossible,  and  we  purpose  to  end  them  all.  We  declare  them  to 
be  the  product  of  the  present  system  in  which  industry  is  carried  on 
for  private  greed,  instead  of  for  the  welfare  of  society.  We  declare, 
furthermore,  that  for  these  evils  there  will  be  and  can  be  no  remedy 
and  no  substantial  relief  except  through  socialism,  under  which 
industry  will  be  carried  on  for  the  common  good  and  every  worker 
receive  the  full  social  value  of  the  wealth  he  creates. 

Society  is  divided  into  warring  groups  and  classes,  based  upon 
material  interests.  Fundamentally,  this  struggle  is  a  conflict  between 
the  two  main  classes  one  of  which,  the  capitalist  class,  owns  the  means 
of  production,  and  the  other,  the  working  class,  must  use  these  means 
of  production  on  terms  dictated  by  the  owners. 


V 

SOME  PROGRAMS  OF  SOCIAL  REFORM  923 

The  capitalist  class,  though  few  in  numbers,  absolutely  controls 
the  Government — legislative,  executive,  and  judicial.  This  class  owns 
the  machinery  of  gathering  and  disseminating  news  through  its  organ- 
ized press.  It  subsidizes  seats  of  learning — the  colleges  and  schools — 
and  even  religious  and  moral  agencies.  It  has  also  the  added  prestige 
which  established  customs  give  to  any  order  of  society,  right  or  wrong. 

The  working  class,  which  includes  all  those  who  are  forced  to  work 
for  a  living,  whether  by  hand  or  brain,  in  shop,  mine,  or  on  the  soil, 
vastly  outnumbers  the  capitalist  class.  Lacking  effective  organization 
and  class  solidarity,  this  class  is  unable  to  enforce  its  will.  Given  such 
class  solidarity  and  effective  organization,  the  workers  will  have  the 
power  to  make  all  laws  and  control  all  industry  in  their  own  interest. 

All  political  parties  are  the  expression  of  economic  class  interests. 
All  other  parties  than  the  Socialist  party  represent  one  or  another 
group  of  the  ruling  capitalist  class.  Their  political  conflicts  reflect 
merely  superficial  rivalries  between  competing  capitalist  groups. 
However  they  result,  these  conflicts  have  no  issue  of  real  value  to  the 
workers.  Whether  the  Democrats  or  Republicans  win  politically,  it 
is  the  capitalist  class  that  is  victorious  economically. 

Socialism  the  expression  of  the  workers. — ^The  socialist  party  is  the 
political  expression  of  the  economic  interests  of  the  workers.  Its 
defeats  have  been  their  defeats  and  its  victories  their  victories.  It  is 
a  party  founded  on  the  science  and  laws  of  social  development.  It 
proposes  that,  since  all  social  necessities  today  are  socially  produced, 
the  means  of  their  production  and  distribution  shall  be  socially  owned 
and  democratically  controlled. 

In  the  face  of  the  economic  and  political  aggressions  of  the 
capitalist  class  the  only  reliance  left  the  workers  is  that  of  their 
economic  organizations  and  their  political  power.  By  the  intelligent 
and  class-conscious  use  of  these,  they  may  resist  successfully  the 
capitalist  class,  break  the  fetters  of  wage  slavery,  and  fit  themselves 
for  the  future  society,  which  is  to  displace  the  capitalist  system.  The 
Socialist  party  appreciates  the  full  significance  of  class  organization 
and  urges  the  wage-earners,  the  working  farmers  and  all  other  useful 
workers  everywhere  to  organize  for  economic  and  political  action,  and 
we  pledge  ourselves  to  support  the  toilers  of  the  field  as  well  as  those 
in  the  shops,  factories,  and  mines  of  the  Nation  in  their  struggles  for 
economic  justice. 

In  the  defeat  or  victory  of  the  working  class  party  in  this  new 
struggle  for  freedom  lies  the  defeat  or  triumph  of  the  common  people 


924  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

of  all  economic  groups,  as  well  as  the  failure  or  the  triumph  of  popular 
government.  Thus  the  Socialist  party  is  the  party  of  the  present-day 
revolution,  which  marks  the  transition  from  economic  individualism  to 
socialism,  from  wage  slavery  to  free  co-operation,  from  capitalist 
oligarchy  to  industrial  democracy. 

Working  programme. — As  measures  calculated  to  strengthen  the 
working  class  in  its  fight  for  the  realization  of  its  ultimate  aim,  the 
Co-operative  Commonwealth,  and  to  increase  its  power  of  resistance 
against  capitalist  oppression,  we  advocate  and  pledge  ourselves  and 
our  elected  officers  to  the  following  programme: 

Collective  ownership. — First:  The  collective  ownership  and 
democratic  management  of  railroads,  wire  and  wireless  telegraphs  and 
telephones,  express  service,  steamboat  lines  and  all  other  social  means 
of  transportation  and  communication  and  of  all  large-scale  industries. 

Second:  The  immediate  acquirement  by  the  municipalities,  the 
States  or  the  Federal  Government  of  all  grain  elevators,  stock  yards, 
storage  warehouses,  and  other  distributing  agencies,  in  order  to  reduce 
the  present  extortionate  cost  of  living. 

Third:  The  extension  of  the  public  domain  to  include  mines, 
quarries,  oil  wells,  forests,  and  water  power. 

Fourth:  The  further  conservation  and  development  of  natural 
resources  for  the  use  and  benefit  of  all  the  people: 

(a)  By  scientific  forestation  and  timber  protection. 

(b)  By  the  reclamation  of  arid  and  swamp  tracts. 

(c)  By  the  storage  of  flood  waters  and  the  utilization  of  water 
power. 

{d)  By  the  stoppage  of  the  present  extravagant  waste  of  the  soil 
and  of  the  products  of  mines  and  oil  wells. 

(e)  By  the  development  of  highway  and  waterway  systems. 

Fifth :  The  collective  ownership  of  land  wherever  practicable,  and 
in  cases  where  such  ownership  is  impracticable,  the  appropriation  by 
taxation  of  the  annual  rental  value  of  all  land  held  for  speculation 
or  exploitation. 

Sixth:  The  collective  ownership  and  democratic  management  of 
the  banking  and  currency  system. 

Unemployment. — The  immediate  Government  relief  of  the 
unemployed  by  the  extension  of  all  useful  public  works.  All  persons 
employed  on  such  works  to  be  engaged  directly  by  the  Government 
under  a  work  day  of  not  more  than  eight  hours  and  at  not  less  than 
the   prevailing   union    wages.     The    Government   also   to   establish 


SOME  PROGRAMS  OF  SOCIAL  REFORM  925 

employment  bureaus;  to  lend  money  to  States  and  municipalities, 
without  interest,  for  the  purpose  of  carrying  on  public 'works,  and  to 
take  such  other  measures  within  its  power  as  will  lessen  the  widespread 
misery  of  the  workers  caused  by  the  misrule  of  the  capitalist  class. 

Industrial  demands. — The  conservation  of  human  resources, 
particularly  of  the  lives  and  well-being  of  the  workers  and  their 
families : 

First:  By  shortening  the  work  day  in  keeping  with  the  increased 
productiveness  of  machinery. 

Second:  By  securing  to  every  worker  a  rest  period  of  not  less  than 
a  day  and  a  half  in  each  week. 

Third:  By  securing  a  more  effective  inspection  of  workshops, 
factories  and  mines. 

Fourth:  By  forbidding  the  employment  of  children  under  sixteen 
years  of  age. 

Fifth :  By  abolishing  the  brutal  exploitation  of  convicts  under  the 
contract  system  and  prohibiting  the  sale  of  goods  so  produced  in  com- 
petition with  other  labor. 

Sixth :  By  forbidding  the  interstate  transportation  of  the  products 
of  child  labor,  of  convict  labor  and  of  all  uninspected  factories  and 
mines. 

Seventh:  By  abolishing  the  profit  system  in  Government  work, 
and  substituting  either  the  direct  hire  of  labor  or  the  awarding  of 
contracts  to  co-operative  groups  of  workers. 

Eighth:  By  establishing  minimum  wage  scales. 

Ninth:  By  abolishing  official  charity  and  substituting  a  non- 
contributory  system  of  old-age  pensions,  a  general  system  of  insurance 
by  the  State  of  all  its  members  against  unemployment  and  invalidism 
and  a  system  of  compulsory  insurance  by  employers  of  their  workers 
without  cost  to  the  latter,  against  industrial  diseases,  accidents, 
and  death. 

Political  demands. — First:  The  absolute  freedom  of  press,  speech, 
and  assemblage. 

Second:  The  adoption  of  a  graduated  income  tax,  the  increase 
of  the  rates  of  the  present  corporation  tax  and  the  extension  of 
inheritance  taxes,  graduated  in  proportion  to  the  value  of  the  estate 
and  to  nearness  of  kin — the  proceeds  of  these  taxes  to  be  employed 
in  the  socialization  of  industry. 

Third:  The  gradual  reduction  of  all  tariff  duties  particularly 
those  on  the  necessities  of  life.     The  Government  to  guarantee  the 


926  MATERIALS  FOR  ELEMENTARY  ECONOMICS 

re-employment  of  wage-eamers  who  may  be  disemployed  by  reason 
of  changes  in  tariff  schedules. 

Fourth:  The  abolition  of  the  monopoly  ownership  of  patents 
and  the  substitution  of  collective  ownership,  with  direct  rewards  to 
inventors  by  premiums  or  royalties. 

Fifth:   Unrestricted  and  equal  suffrage  for  men  and  women. 

Sixth :  The  adoption  of  the  initiative,  referendum  and  recall,  and 
or  proportional  representation,  nationally  as  well  as  locally. 

Seventh:  The  abolition  of  the  Senate  and  of  the  veto  power  of 
the  President. 

Eighth:  The  election  of  the  President  and  Vice-President  by  direct 
vote  of  the  people. 

Ninth :  The  abolition  of  the  power  usurped  by  the  Supreme  Court 
of  the  United  States  to  pass  upon  the  constitutionality  of  the  legisla- 
tion enacted  by  Congress.  National  laws  to  be  repealed  only  by  act 
of  Congress  or  by  a  referendum  vote  of  the  whole  people. 

Tenth :  The  abolition  of  the  present  restrictions  upon  the  amend- 
ment of  the  Constitution,  so  that  that  instrument  may  be  made 
amendable  by  a  majority  of  the  voters  in  a  majority  of  the  States. 

Eleventh :  The  granting  of  the  right  of  suffrage  in  the  District  of 
Columbia  with  representation  in  Congress  and  a  democratic  form  of 
municipal  government  for  purely  local  affairs. 

Twelfth:  The  extension  of  democratic  government  to  all  United 
States  territory. 

Thirteenth :  The  enactment  of  further  measures  for  general  edu- 
cation and  particularly  for  vocational  education  in  useful  pursuits. 
The  Bureau  of  Education  to  be  made  a  department. 

Fourteenth :  The  enactment  of  further  measures  for  the  conserva- 
tion of  health.  The  creation  of  an  independent  Bureau  of  Health, 
with  such  restrictions  as  will  secure  full  liberty  to  all  schools  of 
practice. 

Fifteenth:  The  separation  of  the  present  Bureau  of  Labor  from 
the  Department  of  Commerce  and  Labor  and  its  elevation  to  the  rank 
of  a  department. 

Sixteenth :  Abolition  of  all  Federal  District  Courts  and  the  United 
States  Circuit  Courts  of  Appeals.  State  courts  to  have  jurisdiction 
in  all  cases  arising  between  citizens  of  the  several  States  and  foreign 
corporations.    The  election  of  all  judges  for  short  terms. 

Seventeenth:  The  immediate  curbing  of  the  power  of  the  courts  to 
issue  injunctions. 


SOME  PROGRAMS  OF  SOCIAL  REFORM  927 

Eighteenth :  The  free  administration  of  justice. 

Nineteenth:  The  calling  of  a  convention  for  the  revision  of  the 
Constitution  of  the  United  States. 

Such  measures  of  relief  as  we  may  be  able  to  force  from  capitalism 
are  but  a  preparation  of  the  workers  to  seize  the  whole  powers  of 
government,  in  order  that  they  may  thereby  lay  hold  of  the  whole 
system  of  socialized  industry  and  thus  come  to  their  rightful 
inheritance. 


UNIVERSITY   OF  CALIFORNIA  LIBRARY 

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JHB  Marshall  - 

171^5         Materials  for 
M35  the   study  of 

elementary  econ. 


.UCSOUTHfRrjREGIOMAL 


LIBRARY  FACILITY 


AA    000  549  973    6 


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